Showered By the Sweat of the Sun

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In today’s Daily Reckoning you’ll get the long-awaited look at why America’s mushrooming mortgage fraud fiasco is bad news for Australian housing. All you housing bulls will have to tear yourself away from counting your rivers of gold for a second and pay close attention. But first, speaking of gold, take a close look at the man below.

“Sucka, you betta sell your gold now fool!”

Bloombery Television interview with Mr. T

Source: http://www.youtube.com/watch?v=pWAu7FmKbYc&feature=player_embedded# !

In case you missed it, gold set a new high in the futures market overnight at $1,374.15. Minutes from the last Federal Reserve meeting showed the lunatics in charge of America’s money supply want Americans to fear inflation so they spend their money before it’s made worthless. The commodity markets responded with enthusiasm.

In fact, gold’s intraday high was fourteen dollars and fifteen cents higher then when Mr. T went on Bloomberg television to represent a gold company. Your first reaction when you see Mr. T on Bloomberg , draped in gold, might be “sell.” It’s a comic scene and apparently absurd.

But wait! Mr. T is not on television to sell you gold. That would surely be a sign of the top. He’s on television representing a company that BUYS your gold. And that’s how you know that the popular culture doesn’t really understand gold as money yet. When the man in the street thinks that high gold prices are a reason to sell your gold jewellery now, you know the gold bull has not reached the mania phase yet.

By the way, Mr. T is an eloquent speaker, isn’t he? He said that in ancient times gold was thought of (maybe by the Incas, or someone like them) as “the sweat and tears of the sun.” And if he really did buy gold back in the late 1970s, he’s a rich man now (although he had a fair bit of waiting to do before the post Bretton Woods global fiat standard money system began collapsing into ruin.)

But none of this is really big news here in Australia. The gold price in Aussie dollars won’t move up with monster truck force until the U.S. dollar gets stronger. Yet the Aussie dollar is fast approaching parity. No sign of weakness there, not yet.

Right now, Australia is the main global beneficiary of the risk carry trade. Cheap global interest rates are driving investors into high-yielding currencies and commodities. That’s double plus good for Australia. It’s going to take a reversal of the “risk” trade for Aussie gold to move up and the Aussie dollar to move down.

There are plenty of risks, too. One of them, for example, is the continued blasé attitude about Australia’s dependence on foreign capital to fund its real estate lending. “Talk of housing bubble hot air,” is the headline of Katja Buhrer’s article on page 58 of yesterday’s Australian Financial Review. IN a moment, we’ll see if you can spot the conflict of interest.

But in the story, Ian Graham, the CEO of QBE LMI says that it’s a good sign banks are increasing loan-to-value ratios from 90% to pre GFC levels of 95%. Seriously. He says, “It’s a positive sign that [banks] don’t have credit concerns about a 95% loan not being prudent or suitable for the borrowers…I wouldn’t see the banks as becoming less prudent. I’d see them as feeling more comfortable, particularly given the positive outlook for the economy.”

Because nothing could ever go wrong lending 95% of a home’s value to a borrower based on a good feeling about the economy. Of course not! To prove how good things are, or how bad they are not, why not trot out a study that tells you what you want to hear!

BIS Shrapnel managing director Rob Mellor, in the same article, suggested people like your editor just “don’t get Australia.” “We’re chasing shadows out there, looking for reasons why a worst-case scenario would happen, when we did all that back in the latter part of 2008 and the early part of 2009 and we got through the worst of that.”

“So why would we do it again until we see clearly the risk of something overheating…or some of the fundamental drivers of the economy changing that actually would lead to a reversal of the economic growth rates predicted and therefore a substantial rise in the unemployment rate.”

You’d think one of the “fundamental drivers” of the Aussie housing market is the fact that Aussie banks borrow about 30 cents of every dollar they lend from someone overseas. In another global capital crisis, this could be a problem. It could also be a problem that Aussie banks have 60% of their loan books secured by residential property. As Buhrer says, “the health of the economy is linked to house prices.”

That’s another way of saying the health of the economy is linked to the health of banks. Not a problem right? Not if house prices keep going up. And just a few pages later, we find that both QBE and BIS are predicting just that!

“Stronger markets’ prices tipped to grow 20pc” reports Michael Hobbs on page 61. He reveals that “median house prices in Sydney, Perth and Adelaide are forecast to rise by around 20 per cent in the next three years, according to new research.”

Whose research, you might wonder? “Mortgage insurer QBE LMI’s Australian Housing Outlook compiled by BIS Shrapnel found an improving economy and a shortfall in dwellings will fuel a rise in house prices.

How much exposure do you think QBE has to commercial and/or residential real estate in Australia?

Meanwhile, U.S. mortgages are the new asbestos. How long will it be before dozens of class action lawsuits are filed against U.S. banks? Pick your reason!

Homeowners can argue that banks illegally foreclosed on homes they couldn’t prove they actually owned. In a purely rational way, even if you WERE foreclosed on legitimately, or even if you KNOW you can’t keep your home, you might be able to keep it anyway by threatening the bank with legal action.

And what bout investors who can claim that the bank sold a security it didn’t own? If it were just a matter of the big banks versus hundreds of thousands of even millions of so-called “deadbeat borrowers,” bank lobbyists could convince the U.S. Congress to relax foreclosure laws and put these peons to the sword.

But the big investors in mortgage backed securities won’t be pushed around so easily. They have deep pockets. They have lobbyists too. And they have investors to answer to. Going to court is a real option.

Wells Fargo, another U.S. bank at the centre of the storm, admitted yesterday that it was guilty of the same “robo signing” process for handling thousands of foreclosures, perhaps illegally. It joins JP Morgan, GMAC, and Bank of America.

Jamie Dimon, the CEO of JP Morgan, thinks the banks will get off with a fine. He told investors on a conference call that, “We don’t think there are cases where people have been evicted?…?where they shouldn’t have been…Obviously it will increase our costs a little bit and maybe we’ll have to pay penalties eventually to some of the [attorneys-general]”.

Somebody tell him he’s dreaming.

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. Not sure what tricks the government will pull out to prop up Australian housing, but we are sure in for a wild ride as the currency wars intensify!

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  2. Strange day. Didn’t see the front page of Wednesday’s ‘West Australian’ but we hear it was a humdinger… . Three calls today about a block we’ve got for sale at present. Anything to do with the BIS/QBE prediction? We’ve no idea, but the block has had a sign on it for nearly three weeks, without any interest… and suddenly we get three calls, today.

    Then tonight I read this:

    http://www.watoday.com.au/wa-news/housing-money-flows-to-the-golden-triangle-20101014-16l5g.html

    Interesting times… .

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  3. Biker called neg gearing on PPORs (homes) a while back Chris – That would do it! :D

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  4. Reduction of stamp duty on land would also boost sales and construction, Ned.

    Despite the brilliance of the First Home Savers Scheme, it hasn’t been as popular as the government had hoped it might be. It appears the generation most likely to use it sees four years’ saving as forever.
    Both our kids jumped at it as an after-tax (haven) of 21.25% p.a.
    Apparently you ‘maintain the credit’ on home purchase until 65!

    Owner-occupied NG doesn’t really address the _main_ issue of decreased construction, which depletes the tax base and raises unemployment rates.
    It may well happen, but I think we may see something else happen, a reversal of present government policies. With an ageing population, it would not surprise me to see some pre-election emphases diluted…

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  5. But don’t tell anyone – It’s a secret! As is this:

    http://www.bloomberg.com/news/2010-10-13/mortgage-flaws-may-lead-investors-to-challenge-1-3-trillion-of-securities.html

    Still holding – Win a few; Lose a few … :D

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  6. Was that last sentence phrased euphemistically enough, d’ya reckon? ;)

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  7. So US housing becomes ‘unsafer’. Who’d have thought it possible?! And the already hazardous purchase of a home in America becomes even more fraught with Elm Street Nightmares.

    No wonder our Bill seeks refuge in France and Argentina! :D

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  8. …and Ecuador!~ ;)

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  9. Ned: “But don’t tell anyone – It’s a secret!”

    More than my cojones are worth if I leak the plan, mate!~

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  10. Yep, no point worrying about what one can’t fix – Hedge and be happy if one is a dummy like me! :)

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  11. I see our mate The Realist disagrees with me… and agrees with you, Ned.
    Nope, I see it all in the stars!~ :D

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  12. I shake my head in despair at the American Financial types. And their politicos. No wonder Hank Paulson demanded immunity from prosecution before he’d roll out their bank rescues.

    While I might think Mr. T’s duds look like PJs of the worst possible taste, I don’t think I’ll tell him that face to face. Nice haircut though – Wonder what it’ll look like when he goes grey? For some reason the word ‘cockatoo’ comes to mind.

    Yes, poor ole Billy Bonner would seem to be smart enough to realize that he has a lot to be depressed about. If he was an introspective type who was inclined to think on such things? :D

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  13. What I really like about Bill is his ability to not-take-himself-too-seriously, Ned… . Gotta admire that… !

    His concern for his kids also resonates with me… and his back-to-the-land tendencies also strike a happy chord. :D

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  14. Ditto to both those points Biker!

    I’m still naughty enough to look forward to hearing him ask Mr. T how come he doesn’t wear a “Stars ‘n Bars” type flag on his chest close to his heart though? :D

    Brings to mind thoughts of the immortal Norman Gunston/Mohammed Ali clash! ;)

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  15. Thought Norman outside the White House* was a classic!~
    (But I _was_ cringeing!~ :D )

    * Back in the old daze, when I used to bother shaving… . ;)

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  16. http://www.perthnow.com.au/business/prices-down-as-wa-property-market-floods/story-e6frg2ru-1225939325755?from=public_rss

    This one will cheer you up Biker,

    HOUSE prices in Perth are on a downward trend with sellers reducing asking prices by 6 per cent as the local market floods with properties for sale, according to the Real Estate Institute of Western Australia.

    And if the REAL ESTATE INSTITUTE OF WESTERN AUSTRALIA are saying that,
    Then it really must be TRUE hahaha

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  17. You really do seem to have very poor listening skills Steve? Biker has said on NUMEROUS occasions that he isn’t very worried about what house prices do. As he lives on the rents. You are the one who is worried about what house prices do. As am I to some extent.

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  18. Biker has said on NUMEROUS occasions that he isn’t very worried about what house prices do. As he lives on the rents.

    Yes Ned, and pigs fly. Biker would rather higher house prices…

    What do you want to happen to prices ned?

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  19. Difficult to explain anything to a fella who still hasn’t figured out how a question mark works, Ned!!~ ;)

    DReAders may remember that a few months ago, Steven singled out the Perth beach suburb of Scarborough as a poor investment. I responded that it had scored a 19% rise last year.

    This year, it hasn’t done quite as well:

    http://www.watoday.com.au/wa-news/housing-money-flows-to-the-golden-triangle-20101014-16l5g.html

    To save you the trouble of attempting to decipher the stats, Steven, here’s the gist:

    “Scarborough, 340, $455,000, $242.772m, 14.8%”

    Up 14.8%. Are you even _beginning_ to get the picture? :D

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  20. Just goes to prove my point Ned:

    Biker loves house price rises, if he didn’t care as you put it
    why in the last post did he get so excited about it, complete with a smiley face at the end?

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  21. “Are you even _beginning_ to get the picture? :D ”

    Nope. Clearly not.

    Ned is correct. It matters not a drot, as Shoes would mathematically intone.
    Rents return us ten times your wage, mate… virtually tax free, annually.
    Our _refund cheques_ almost equal your wage.

    Why continually stir me up, son? Have a handkerchief ready, every time you try… . ;)

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  22. What do I ‘want’ to see happen to our house prices?

    I’d personally like to see them drop ‘a bit’ – As much for reasons of national indebtedness as anything else. But not to the point where that drop causes us the sort of hugely damaging problems we are seeing elsewhere.

    Not sure I’ll get what I ‘want’ though – It’s possible they could even go up. But I’m not betting on that at all right now. Though life is like a box of chocolates as I’ve quoted before.

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  23. “…why in the last post did he get so excited about it, complete with a smiley face at the end?”

    I’m always, smilin’, ya silly dork. :D

    Why? Because I _act_ when I see a good buy. The only time I frown :( is when I miss a great deal! Unfortunately, you won’t ever see a good deal, even if it comes gilt-edged and tied with a big red bow. You’ll always think you’ll pick it up 40 – 70% off!~ :D

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  24. Would you like to see house price return to their historical levels?
    3-4 times yearly income?
    so for an average house in Brisbane to cost about 200K, thats average house, not a house in Ipswich or loganville?

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  25. Jeez… . I take it back! He used a question mark _correctly,_ four posts back. Will wonders never cease? Maybe my time here is not completely wasted!~ ;)

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  26. “Would you like to see house price return to their historical levels?”

    Sure – Over the next 20 years maybe. So it doesn’t damage the economy.

    But it would need to happen in conjunction with some sort of ‘one family one job’ policy perhaps plus a huge number of other societal changes and changes in our expectations and even things like our super. That I’ve got NO reasons to believe Aussies are at all keen to embrace any time soon.

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  27. ‘one family one job’ policy
    Why is that?
    Have women only been working since about the year 2000 since house prices went crazy?

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  28. Oh dear, now it’s Maths:

    “3-4 times yearly income?”

    Double incomes now, son: 6 – 8 times average income. Spot on for Perth.
    Sydney? Well, we found you a place for 7.5 times your income. Room to swing-a-feline, too. Nope, you’ll wait ’til it’s <$180K, thanks… .

    Good luck with that… . :D

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  29. I was asking Ned S, but thanks for the commentary

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  30. “Have women only been working since about the year 2000 since house prices went crazy?”

    There’s lot of issues Steve. That would seem to have impacted over decades. So no, I don’t feel to try and make a case for any specific one of them out of the broader context.

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  31. Leave ya to it, Ned. Progress is being made, but at the-end-of-the-day, nothing much has changed in the last few years’ mentoring.

    Don’t think I’ve ever been forgiven for declining Steven’s online request to _give_ him one of our properties! Hell, I wouldn’t give either of our kids one of our properties… not that they’d ever even request a dollar!
    Might _borrow_ from them, though!~ ;)

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  32. Biker I thought it would have been a fair proposition for me to buy one of your properties off you for the same price it cost you (Inflation adjusted).
    So if it cost you 3 times average wage when you purchased it, then I would pay you 3 times the yearly wage for it, but you refused to take me up on the offer.

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  33. Ned the impression I got from you when you said ‘one family one job’ policy was that you thought that since women have been working that made the prices double.

    Was I wrong to make this assumption?

    Because I am quite sure woman have been in the workforce for quite a while now, and like I said I don’t think that when house prices exploded early last decade it had any thing to do with woman working (which they already had been for years before that).

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  34. Well it wasn’t ON me, son. You could buy it FROM me, though.*
    Like to see what you _really_ said?!~ ;)

    Nah, tossed it up… . Talk to a doorpost or Steve?
    Off to chat to the doorpost. It’s thinner, son.

    Sorry, Ned. He brings out the very worst in me.
    He’s all yours… . :D

    * Should be charging you for teaching you English, Steven.
    Where are you from again?!~

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  35. Biker: “You’re a very attractive young doorpost!”

    Doorpost: “That Bin 128 has gone straight to your head, Peter! :( ”

    Biker: “You’re a very attractive blond doorpost, Tamara!~ ;) ”

    Doorpost: “Which head is talking now, Biker????!!!!~”

    Biker: “Tamara, on a site that plugs The Invaluable Great Mogambo, you can get away with just about anything. Unvesting is easy!” (Unvests and falls down the last three stairs.)

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  36. “Ned the impression I got from you when you said ‘one family one job’ policy was that you thought that since women have been working that made the prices double.

    Was I wrong to make this assumption?”

    Yes Steve, you were wrong in making that assumption. I’m no expert but one big issue is probably deregulation of our banking back in the 1980’s. With lots of issues both before and since (including two income families) having contributed to how much income people have to leverage up on. Plus stuff like neg gearing and the poor returns on stocks and limited land releases and Aussies’ apparent dislike of living in highrise stuff and poor public transport and FHOGs and even maybe decreasing public housing and increasing rental subsidies etc etc etc. LOTS of issues as I said.

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  37. “Unvests and falls down the last three stairs” – Good to see a bloke enjoying himself! At the end of the day, that really IS very important. IMO … :)

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  38. Rising groggily from bed this morning, I found a breathalyzer has been installed on my iMac, Ned! ;)

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  39. @ Steve “Because I am quite sure woman have been in the workforce for quite a while now, and like I said I don’t think that when house prices exploded early last decade it had any thing to do with woman working (which they already had been for years before that).”

    That is very true Steve but remember that up until the late nineties, interest rates will still quite high as well as unemployment as well:

    Average
    variable Average
    Interest Rates Unemployment
    1994 9.1 9.5
    1995 10.5 8.2
    1996 9.7 8.2
    1997 7.2 8.3
    1998 6.7 7.7
    1999 6.6 6.9
    2000 7.7 6.3
    2001 6.8 6.8
    2002 6.4 6.4
    2003 6.6 5.9
    2004 7.1 5.4
    2005 7.3 5.0
    2006 7.6 4.8
    2007 8.2 4.4
    2008 8.9 4.2
    2009 6.0 5.6
    2010 7.2 5.4

    Notice how although the interest rates flatten out from late nineties onwards – the unemployment rate keeps dropping. Note that the unemployment rate is an australian average – it will be up and down depending on the area/city you are looking in. I feel that this can go a little way to explain how prices went crazy from the late nineties onwards.

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  40. OMG – it slaughtered my formatting!!!! sorry guys :(

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  41. Average
    variable
    Interest Rates
    1994 9.1
    1995 10.5
    1996 9.7
    1997 7.2
    1998 6.7
    1999 6.6
    2000 7.7
    2001 6.8
    2002 6.4
    2003 6.6
    2004 7.1
    2005 7.3
    2006 7.6
    2007 8.2
    2008 8.9
    2009 6.0
    2010 7.2

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  42. Average
    Unemployment
    1994 9.5
    1995 8.2
    1996 8.2
    1997 8.3
    1998 7.7
    1999 6.9
    2000 6.3
    2001 6.8
    2002 6.4
    2003 5.9
    2004 5.4
    2005 5.0
    2006 4.8
    2007 4.4
    2008 4.2
    2009 5.6
    2010 5.4

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  43. You’re not the first to suffer that, Don!

    I guess the other relevant issue is the rise in women’s wages, in the last few years. The top classroom teacher’s wage in WA is now $90K+. (And my missus, a chalkie, got a 4% wage increase last week.)

    Now that may not be considered a great single income*, but as a _second_ income, it certainly provides an edge in the home purchase market.

    * I recall a female concentrator operator,the wife of a miner back in ’81, telling us her wage was $90K+ a year!~ :D

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  44. The other factor of course is average wages – don’t worry after the last three failed attempts I wont post that – however you will no doubt see that increasing as well. Using your 3.5 times average household income formula Steve, I feel you will arrive at a base price for dwellings. Now if unemployment starts rising sharply to 90’s levels (heaven forbid) you will see that base price drop no doubt.

    Of course – as I keep banging on and on about – looking at Cairns (10-14% unemployment) you will see that the average unit/house price is about 100k lower than a place with better employment prospects like Townsville. This is mitigated a bit of course by those unscrupulous interestate speculators such as the Biker – I spit on your depreciation schedule sir!!! :)

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  45. Heh you beat me to that one Biker – the wages I mean, not the schedule. So, Steve, when you are looking for a 40% decrease in house prices, you are effectively wanting either a massive increase in interest rates, a high unemployment rate or both. Interest rates I can handle, but bugger the unemployment for a joke :(

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  46. Yes, Depreciation Schedules assist*, especially when you own rentals outright, Don.

    Just got our land tax papers. They average $44.28 per property, including vacant lots. Nice to be able to give a state government kudos for a change…

    * But they’re just one of numerous write-offs.

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  47. Comment by Biker Pete on 16 October 2010:

    The top classroom teacher’s wage in WA is now $90K+
    Now that may not be considered a great single income*, but as a _second_ income, it certainly provides an edge in the home purchase market.

    A co worker and I were discussing house prices back before the GFC hit, one of the things he mentioned for the house prices escalating so much over the last couple of decades or so was women joining the workforce in larger numbers.. he specifically says from around the early 80’s recession it become more and more common for women to be working. The result.. Joe Average would turn up to an auction with a pre approved loan of around $100k based on his wage, and found himself bidding against Mr and Mrs Dincome with their pre approved loan of $150k
    being able to put bid Joe. I think there is some “basis of fact” in that. How big an influence is hard to say but I think for sure some influence is made.

    Bikers comment implies agreement.. that extra money makes a difference on how much people can afford to pay..

    The average wage in Australia is a little over 60k though.. Many people get a lot more which means many get a lot less too… Hence the low yeilds on rental property in Melbourne and Sydney.. Affordability is not there for landlords to up the rents. While we were seeng such great capital growth most would not have cared so much about the yeild, as mortgage rates rise and capital growth slows, will they still put up with these low yeilds or TRY and raise rents? Time will tell. The suburb I live in has a high buying/ownership rate.. I am however noticing quite a few For Sale signs on house front lawns.. more than I have seen for some time..

    Stillgotshoeson
    October 16, 2010
    Reply
  48. We’re seeing more for sale signs, too, Shoes. We think it may herald an upturn in the economy here. Aussies traditionally changed houses around every five years. The plateau means many have extended out to seven or eight. We’re now seeing a lot more sales in the $400 – $700K market here.

    A blogger made a very interesting comment elsewhere recently, noting that it’s _not_ the folk on ‘average’ wages who are actually buying houses, which confirms your point; but at the same time may affirm that these high-waged double-income earners present serious competition to a single bloke on the average wage.

    Most of our tenant families have both partners working; and dual incomes over $150K per year. Around half are homeowners themselves.
    They’d ‘outbid’* most single folk easily.

    ‘Yield’ is an interesting concept. I could quote nonsense verbatim from a realtor’s recent newsletter to demonstrate this. Conversely, most bloggers err on the downside, simply because they’re inexperienced in rental tax provisions. I’m not questioning the east coast extremes in which some naif pays $1.2 mil for a rental and can only fetch $600pw. That’s akin to roulette, even if they’re burning these tax losses against other capital gains. ;)

    * Not referring to auctions here. Very few in WA. Friends who couldn’t get a bite above $900K last year were astonished to pick up $1.265 mil, when couples started a bidding war for their Federation-style home this year.
    Hoping to get $1.2 mil, they picked up $65K more. Offers were all _cash_.

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  49. …real estate in coastal cities rises in price more quickly and declines less quickly than inland localities…any bird can tell the difference between half a city and a whole one…people crowding into half a city drive valuations up, while for example a city along a river has two equal halves, or indeed along a railway line, although there’s always a premium for locating on the right side…as opposed to the wrong side!…

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  50. Growing up on the Swan River we’d sail past the East Perth slum of Claisebrook. East Perth was unquestionably the ‘wrong side of the river’… and the ‘wrong side of the tracks’. A virtual no-go zone in the fifties, we were warned by our parents to avoid it.

    Half a decade later, it’s one of Perth’s jewels, with countless superb apartments clustered along its shores, none less than a million bucks. Missed that one… !~

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  51. The other thing that people forget these days is that quite a few of what you would consider prime beach suburbs now had the problem of raw sewage discharge points being nearby. For example at Sydney, it was not until the early nineties that sewage was discharged further out to sea and then better treated until it wasn’t a problem. Major outfalls were at places like Manly, Bondi, Malabar, Cronulla. Being close to these areas was not considered to be a good thing. I suspect the same was true of quite a few other towns/cities on the coast, hence why they were not so popular before.

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  52. Yes, even I remember the days of the Bondi Cigar, Don!~ :D

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  53. Hehe – forgot about that old term Biker :)

    Hope you didn’t have any personal experiences with them….

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  54. Just once, Don. I was living in an apartment, right on Bondi Beach, just up from the pool, in ’76.

    Something you don’t forget… ! :D

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  55. Kind of reminds me of a poem someone wrote:

    I did but see you floating by
    and yet I will remember you till I die.

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  56. Don, comparing a bondi chokito to Menzies description of the Queen!!

    Poor women have always worked since Mathusala was a boy. It is only the well off women, (most of whom married money as they were not allowed to own property) that did not. Laundry, service industries and if you promised not to get married, nursing or teaching. Although the traditional economic models do not take account of subsistent farming, it has been a lot of women who could not get paid employment that fed the family.

    World War 2 set the seeds for a permanent paid female workforce, although it took a while to accept women. Heavens my sister was in the public service, got pregnant in 1975 and was forced to resign.

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  57. “my sister was in the public service, got pregnant in 1975 and was forced to resign” – And I should think SO Annie! The rest of us were still finding our kids under cabbage leaves back then!!! Thank heavens for the test tube baby thing we do nowadays … Removes all potential for any grunty smelly sticky human from it hey? ;)

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  58. Jeez, you’re a S.N.A.G, Ned!~ :D

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  59. Good one Ned, although my mum found me under a bluebell in the backyard. No cabbages around my place.

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  60. Thanks Annie – Me mum explained that babies with green eyes come from under live cabbage leaves and babies with brown eyes come from under dead cabbage leaves. Now I also know where the missus found those blue eyed babies she periodically brought home! :)

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  61. It is simple maths people… You cant defy the laws of gravity forever!!!!
    3% above inflation for 100 years means that in 100 years house prices will be about 19 times higher than they are now in real terms. That is a $500,000 house renting for $500 per week will be 9.5 million and only renting for $500 per week.
    Logic people please!!!!!
    If you stretch your arguments out over a longer time frame, you realise how ridiculous they are!!!!
    Property has gone up at the rate above inflation for 2 main reasons.
    1. Easy credit. There is only so much the average person on $65,000 per year can afford in rent and interest payments. If you think that the average person will be able to afford a $9.5 million dollar mortgage with a $40,000 deposit in 100 years then property prices will continue at 3% above inflation. If you are a rational person, you may consider that a bit of a stretch!!!!
    2. More women working – double income. Until we allow multiple wives / or husbands in Australia, this factor in property price growth has a limit. Maybe people are thinking we might be able to follow India’s model and get the 5 year olds working to help pay of a bigger mortgage. The money has to come from somewhere!!!!
    I hope some day the government wakes up and regulates the property industry spruikers who promote their own industry saying things like it will boom 20% over the next 3 years just to get the old “fear and greed” juices flowing in the mass ignorant.
    No one knows if property will crash or boom. People can only know the facts that property must be linked to inflation and wages over the long term and that most divergences from long term trends cannot continue for ever at an increasing rate!!!!

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  62. “Logic people please!!!!!
    If you stretch your arguments out over a longer time frame, you realise how ridiculous they are!!!!”

    When I bought my first ‘serious’ home, an inspiring one-off design which still looks impressive today, it was $31,00.00. At 24, panicking a little,
    I asked friends if I’d made a major financial error. Would I ever get that much for it if I resold it?! They were reassuring.

    I doubled my money in three years, but that isn’t the point. Today it’s worth $600K+…. 19.3 times what I paid for it. (And yes, my _base_ income is 16 times what it was back then.)

    And I guess if you’d told my grandmother that a loaf of bread, just a farthing in her childhood, would cost her grandson nearly 1000 times as much, she’d have wept for her descendants.

    I see WA nurses and teachers both scored 4% annual wage increases in the last week or so. The next increase(s) will ‘compound’ that. ;)

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  63. A S.N.A.G. Biker? Yeah maybe …

    Don: “Kind of reminds me of a poem someone wrote”

    Kind of reminds me of being out swimming one day when a mate yelled out ‘Grogan!!!’ just before something went ‘Splat!’ right next to me? :D

    No dramas – We caught plenty of plenty of nice fish there! ;)

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  64. Sorry I mentioned these things in passing… .

    “A S.N.A.G. Biker?”

    Well, your parents were far more truthful than mine.
    You would _not_ believe the story they told me.
    (I dobbed them into our church. Surprised they weren’t excommunicated… .)

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  65. A ‘SNAG’ being a Sexy Neanderthal Aquarian Gorilla I’m assuming? :D

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  66. A ‘SNAG’ being a Sixy (use NZ accent to bypass the dreaded DRA moderator!) Neanderthal Aquarian Gorilla I’m assuming? :D

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  67. “You would _not_ believe the story they told me” – Yes Biker, as little Boris was heard to remark on having a tummy ache at 10 o’clock one evening and peering in through his ma ‘n pa’s bedroom door keyhole for 10 minutes to see if they’d be awfully upset by being woken … And these people tell me not to pick my NOSE??? :D

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  68. SNAG: Sensitive New-Age Guy, Ned!~ :D
    But your definition may well apply… .

    Serves Little Boris right! Only ten minutes? No persistence at all… .

    Our bishop was no help, BTW… . Told me some tale about apples and snakes, which upon reflection, wasn’t all _that_ far from the truth… .

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  69. “Our bishop was no help, BTW… . Told me some tale about apples and snakes, which upon reflection, wasn’t all _that_ far from the truth”

    That’s the issue with those old snowy haired blokes Biker – They always seem to have a monopoly understanding of ‘the truth’ as it shall be applied to thee! ;)

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  70. Being an ‘old snowy haired bloke’ myself I find the real-life version of Monopoly much more exciting than the various Parker Brothers’ versions…
    Weird feeling having some streets where we’re dominant players!!~

    Really at the crux at the moment, Ned. Missus is anti-SMSF… claims we can do better independent of FAs. No word back from our mate on a Retirement Ideas blog, so I’ll probably launch something early December.
    If not, you’ll hear from me, personally.
    Thanks for your patience.

    2011 promises to be a stellar year. Everything feels just right… . :D

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  71. “Missus is anti-SMSF… claims we can do better independent of FAs.” – I’ve got a SMSF with one house in it and some cash Biker. No need or desire to ever go near an FA regarding same. Why would one?

    “No word back from our mate on a Retirement Ideas blog, so I’ll probably launch something early December.
    If not, you’ll hear from me, personally.”

    Shall look forward to it. Definite money spinner I’d imagine! (With not even a ? Mark on that comment this time which is unusual for a skeptic like me.)

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  72. One of the issues appears to be bringing houses already acquired into a new SMSF; as opposed to starting a SMSF and then acquiring them.

    Accountant’s advice (if we’ve understood it) is that the former isn’t possible; but the latter is… . That is, you start the SMSF, then invest.

    Seems strange, if one can bring already acquired _cash_ into a SMSF, but not property…! Where’s the logic in that, if true…?

    What is really putting the missus off is the idea of an FA taking $20K – $30K+ in fees annually. I think she’d rather pay it in tax!!~

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  73. I believe the info you’ve received is correct. Although perversely enough, if it was ‘business real property’ rather than residential RE, it would be OK is my understanding. The reasoning? No-one is saying that I’m aware of. But I doubt it reflects kindly on their opinion of the honesty of the average tax payer who owns residential RE when it comes to arranging independent valuations for transfer purposes. Plus probably highlights the fact that Johnny Howard’s small businessman type ‘battler’ is a preferred species to Ms Gillard’s residential RE investment property type ‘battler’. And also reflects the fact that while they can live with a relatively small number on business people reducing their tax on a relatively small amount of business real property, they choke on the thought of how much tax they could miss out on if the same rules were applied to residential investment RE.

    The sorts of costs you are talking seem high to me. Any value, when you know what assets you want in a SMSF, just calling in on a couple of local accountants and getting some quotes on doing the annual paperwork? If you intend to truly ‘self manage’, it really should just be the cost of the tax return + the cost to put together statements on the fund’s financial position + the cost of an annual audit. With none of those things requiring FA involvement.

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  74. This one could be a case of ‘going where angels fear to tread’, but your residential RE property holdings are significant enough and you approach things in such a way, that technically it wouldn’t surprise me if the ATO regarded what you do in relation to those investments as a business? But what the implications of that may or may not be in relation to residential RE property that is held in your own names as opposed to a business name is way over my head. (With a SMSF also being a ‘business’ technically I imagine – Leastways they get an ABN.) It sounds like a long shot to me, and even potentially quite iffy if the assets aren’t already held in a business name, but if it was me I’d probably at least ask the question?

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  75. “…the implications of that may or may not be in relation to residential RE property that is held in your own names as opposed to a business name…”

    Yes, we have considered that. Normally one loses the half/half benefit of CGT provisions by going the business path. (But with the SMSF, there’s no tax to pay on CGT, anyway.)

    “…just call… in on a couple of local accountants and get… some quotes on doing the annual paperwork. If you intend to truly ‘self manage’, it really should just be the cost of the tax return + the cost to put together statements on the fund’s financial position + the cost of an annual audit.”

    Exactly what our own accountant recommended, Ned. (Not his speciality.)
    I agree that must be the next step.

    What is clear to us is that little of all this is straightforward.
    It appears each retiree has to approach this maze individually… and the knowledge is held by specialists with deep pockets. While we’d have to accept that each case is different, the amount of ‘wheel re-invention’ must be significant… .

    Very much appreciate your advice, Ned… ! :D

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  76. “…with the SMSF, there’s no tax to pay on CGT, anyway…”

    But what I really meant was:

    “with the SMSF, there’s no CGT to pay, anyway…” :D

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  77. Following might help clarify some points with examples to any who are interested:

    http://www.axa.com.au/axa/axa.nsf/AttachmentsByTitle/AXcessCaseStudies/$FILE/AXcessCaseStudies.pdf

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  78. Great DL, Ned. Thanks. We’ll both read it properly tonight… .

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  79. http://www.axa.com.au/axa/axa.nsf/AttachmentsByTitle/AXcessCaseStudies/$FILE/AXcessCaseStudies.pdf

    Long discussion after reading this, Ned. Some of the examples are ‘fudged’ a little. For example, comparisons are made to a _retail_ Super fund rather than an _industry_ Super fund, where fees can be a quarter to half as much, depending on the particular retail company.

    Case 4 tends to confirm our suspicion that some FAs reap (misspelled!) SMSF players. Consider: Rob is paying $4838 of his $230K in annual fees. That’s around 2%… double an industry fund. Our son’s GF’s mother is getting hammered by her FA at 1.4%. Doesn’t seem like much at 1.4% until you remember that’s over $20K per year in her case! And for what?!

    Further on in case 4, by pooling their a$$ets, Rob and Sue get their fees down to 1.83%. And the article _praises_ that saving!~

    My view? Pay out all debt with Super, bank excess cash and wear any tax. Her view? Mix-and-match with offsets (rather than pay out debt) and cash.

    More work to do on all this. Getting a referral to another specialist accountant… .

    Appreciated the mental exercise, which helped us see other perspectives.
    Thanks, Ned!

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  80. Wouldn’t for a moment recommend one goes through the sort of arrangement being marketed in the link Biker. As it seems to be a SMSF scheme for those who don’t really want a SMSF – Namely one is still paying ‘them’ management fees. And one of the points to a SMSF is that there is no need for any mgt fees at all. Just trundle off to your local accountant; Pay $800 or so to have a SMSF set up; Start moving assets into it; Including from existing super funds in your name if you wish to do so; And start managing the fund assets.

    So rather than the clayton’s SMSF that lot is selling (including their fee structure), it was more the examples of what the tax rates are and potential to minimise them through a SMSF etc that I found interesting.

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  81. Yes, it appeared to us to be an advertising pitch; but not a particularly good one, once analysed a little. Perhaps its real value lies in alerting us to commercial products which enrich these companies!

    I’m encouraged by your SMSF experience, Ned. We’ll let you know how things proceed… . One of the issues is that we’ve done so well, with minimal financial advice from the grim(y) reapers, that it’s hard to convince my own sweet FA that it’s worth getting paid advice!~ ;)

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  82. “Perhaps its real value lies in alerting us to commercial products which enrich these companies!”

    K.I.S.S. Biker, K.I.S.S. – To ‘Tamara’ at least! :D

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  83. Went to a few auctions in Richmond (Melbourne Vic) on Saturday and my god it was like the property market was on fire. We walked around a 4km radius and shuffled passed about 5 auctions, one near the shopping centre on Burnley Street would have easily had 50-60 people attending and that’s before it even kicked off.

    All the auctions had a sense of excitement to them, main attendee’s appeared to be heavily skewed towards the 50+ age group. A lot of money and not afraid to spend seemed to be the general sentiment.

    This weekend was a big test as it was a potential sign that there is a hefty over supply in the housing sector but judging by the site of the auctions i briefly attended i think that over supply will be quickly absorbed. Only one person could buy and that left many many potential owners still searching for something in the upcoming weeks.

    All signs seem to be pointing to small to medium growth, scary really when you consider how far out of control the bubble has got. The sad reality is the older generation will push prices so high that the next generation will predominantly rent for life like other developed nations like France, UK, Singapore etc.

    The only small worrying sign i see is the growing For Lease signs i am seeing in and around our area, if that keeps up the whole thing will start to show strain, you can’t have an investment property without income and you can’t sustain an investment property for any period of time without adequate income. To many For Lease signs means landlords have to drop prices to draw in tenants, once that starts others follow until the owner is faced with a choice, accept less rent and become financially stressed or sell it. Once they get to this point countless others have the same thoughts and then you have a hefty over supply in the market. Once that happens they then shift the focus to price slashing on the sale price and then the bubble goes POP!!

    Fingers crossed al those keen buyers on the weekend are owner occupiers, this area does not need anymore For Lease signs before we start to see the above mentioned price shift

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