Too Expensive

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Today’s Financial Review reports, ‘Loans for the purchase of new homes have virtually collapsed as first home buyers desert the market under pressure from higher interest rates.’

‘Finance for new dwellings plummeted 12 per cent in February to be down almost 36 per cent from three months earlier’

We’re not going to put the boot into housing today…that’s the role of our mate Kris Sayce over at Money Morning. He’s currently stomping all over the flagging housing body and doing a pretty good job.

No, we want to talk about the damage housing is doing to the Australian economy…the detrimental effect of constant government interference and how this obsession with housing and house prices will lower all of our living standards.

Right then.

It should be pretty clear to anyone that first-home buyers are deserting the market because a) housing is too expensive and b) the government’s ‘first-home owners’ boost’ (or more aptly, the ‘recent home-sellers benefit’) is no longer. And therefore, b has reinforced a.

Now, saying that housing to ‘too expensive’ is a pretty general statement open to conjecture. Fair enough.

If you want some proof though, have a read of Steve Keen’s latest article on the housing market. He shows that the average first homeowners mortgage has increased from $72,000 in 1992 to $274,000 in 2011.

That’s a hefty increase. Housing bulls would counter that interest rates are much lower now and incomes much higher, so the structural change in house prices is sustainable. That’s the line peddled by most mainstream economists who work for the banks that have a vested interest in keeping house prices high.

Keen shoots that argument down by showing average loan repayments have increased by 2.8 times since 1992, while the average wage has slightly less than doubled.

Says Keen – ‘While wages have risen, the 2.8 times increase in loan repayments means that mortgage payments on an average first home loan have gone from taking 40 percent of after-tax income of the average worker in the 1990s to 64 percent now.’

That sounds like a reasonable definition of ‘too expensive for us’.

But how is this impacting the broader economy?

Well, firstly, if more and more of your income goes towards servicing and paying off a home loan then you have less income to save or spend elsewhere. Housing is an unproductive investment.

Sure, it provides shelter and security so you can go about your business doing other productive things. But beyond that, it provides no lasting benefits for society.

It shouldn’t come as a surprise then to see Australia’s productivity growth slipping badly. The World Trade Organisation recently released a report that, among other things, raised concerns about Australia’s flagging productivity growth. The report stated that productivity growth had fallen from its long-term average of 1.3 per cent to minus 0.2 per cent.

Productivity is the holy grail of economics. It’s the main factor that leads to a sustainable increase in living standards. We would suggest that over the past decade or two, living standards have in part been boosted by the plentiful availability of credit.

Productivity, as the name suggests, refers to the production of goods or services for a given amount of labour and capital. Growing productivity means a nation produces more for the same cost. It’s like increasing a country’s profit margin.

In recent years, Australia’s profit margins have been squeezed. And our contention is that much of this squeeze is due to overinvestment in housing, which is unproductive.

Consider our foreign-debt levels, which are around $650 billion (December 2010). This is net foreign debt, which means we require foreigners to supply us with debt finance to help fund our living standards.

No real drama’s there. Debt is not a bad thing, as long as it’s employed productively.

Uh – oh.

We’re not sure what the percentage is, but we’d guess that a decent proportion of the foreign debt is actually borrowed by banks to fund home loans. Last year we analysed the balance sheets of the big four banks and found that home loans represented around 60 per cent (on average) of total Australian-based lending.

According to RBA data, business lending growth has been negative since July 2009 while housing lending has continued to grow in the region of 7-9 per cent. The conclusion is that over the past few years, banks have funnelled even more capital into housing at the expense of small and medium sized businesses.

No wonder Australia’s productivity is in all sorts.

Most of you will realise this is the direct result of government intervention. In a blatant and inefficient attempt to prop up the housing market after the credit crisis hit in 2008, the government incentivised housing lending by bribing first-home buyers into the market.

Banks responded by directing their capital to mortgage lending, at the expense of business lending. (Basel rules dictate that banks can set aside less regulatory capital to home loans than they need to do for business lending. Apparently home loans are less risky…)

But now the artificial support has gone, demand for new homes has plummeted.

The same AFR article we quoted above also states that 45,393 mortgages were issued in February, with a whopping 86 per cent written to buy existing homes.

Hang on – we thought there was a housing shortage? Yet the market is not demanding new housing. What is going on then?

We don’t know. But all we ever hear to justify high house prices is that there is a chronic shortage of housing. Yet 86 per cent of people who took out a mortgage last month bought an existing home.

Perhaps this reflects the ponzi nature of Australia’s housing market.

People are just buying and selling existing homes hoping prices keep on rising. Well that’s fine and dandy while banks are supplying increasing credit but that game is over. Housing credit growth has dropped from a peak of 22 per cent in March 2004 to just 7 per cent in February 2011. The housing credit boom is over, which is why house prices are going nowhere.

If there is a housing shortage, then the government should simply restrict negative gearing to newly constructed homes, rather than give everyone a giant tax break for punting on higher prices.

But even that probably wouldn’t work. Negative gearing is part of the problem because it promotes capital gain over income.

For centuries property was predominantly an income-producing asset, with a bit of capital gain thrown in for good measure. In recent decades, Australians have seen property as a capital gain asset with a bit of income thrown in.

With or without negative gearing and with or without more market-distorting government programs, we think Australian residential property is beginning to revert to its historical characteristics.

It might not seem like it, but over the longer term, that will be good for economic growth and, ultimately, our standard of living.

Greg Canavan
For Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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167 Comments on "Too Expensive"

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Gavin R. Putland
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Although I’m a long-time housing bear, I wouldn’t say that “Housing is an unproductive investment.” The basic productive relationship is the employer-employee relationship. And that relationship can’t be formed unless (a) the employer can afford business accommodation out of the proceeds of the business, and (b) the employee can afford housing within commuting distance of the premises out of wages that the employer can afford to pay out of the proceeds of the business. Thus affordability of accommodation, hence SUPPLY of accommodation, is critical for production. Therefore investment in housing is productive in so far as it involves CONSTRUCTION —… Read more »
Technofreak
Guest

Fantastic!
“Can we shoot at the rats as they jump off the ship Dad?”

Biker
Guest

Have to agree with (The World According to) GaRP. Capital gains are evil!

Can I help cut down those Tall Poppies, Dad? ;)

Stillgotshoeson
Guest

http://www.adelaidenow.com.au/home-owners-dip-into-super/comments-e6frea6u-1226034947609

For a lot of them it probably will make zero difference and they will still end up losing their homes.

Biker
Guest

“For a lot of them it probably will make zero difference and they will still end up losing their homes.”

http://www.youtube.com/watch?v=KsWmfljeIq0

You’re singing an old song, Shoes. In all the many variations of forward planning, there’s no substitute for wishful thinking. ;)

Ned S
Guest
I thought about buying some new footwear today – But went Nah, footwear’s not productive – All I need to do is walk around barefoot for a while and my feet will toughen up so the bindis don’t worry me. Then I thought of buying some rump steak for din dins – But went Nah rump steak’s not productive – A bowl of gruel will fill me up. Then I thought of buying some Sunlight Soap – But went Nah, soap’s not productive – It just stops me smelling natural and anyone who doesn’t like me smelling natural can learn… Read more »
Ned S
Guest

Technofreak: “Can we shoot at the rats as they jump off the ship Dad?”

Dad: “Only if you’ve got some money for the bullets Son!” :D

Ned S
Guest

Agree with you about the stamp duty Gavin. But totally disagree about the CGT. It’s a rotten damn tax. A form of double taxation in fact – In that one pays tax on their wages, invests their money that tax has already been paid on (as opposed to choosing to wee it up against the wall) and if they are fortunate enough to make anything, the mongrel damn govt wants to line up and take another chop.

Stillgotshoeson
Guest

Stamp Duty was not preventing people buying en masse prior to the sh!t hitting the fan.

Morons and the naive were crawling over each other, out bidding each other to get “the” house and Stamp Duty was no deterrent… Affordability has been breached, market is tanking and it’s Stamp Duty to blame?

For better or worse, capital gain is income and income is taxed.. Ned your argument is flawed as you do not pay tax on the money you invest.. savings/investments are not taxed, only the income they earn so it is not a “double” tax.

Biker
Guest

“Ned your argument is flawed as you do not pay tax on the money you invest…”

There ya go, Ned. ;)

Biker
Guest

“Ned your argument is flawed as you do not pay tax on the money you invest”

There ya go, Ned!~ ;)

Stillgotshoeson
Guest
I bought $20000 worth of shares in a company in January. Sold them today for a little over $35000 CGT is going to be around $6000 for me so still leaves me with around $9000 profit (45%) Yes the tax is a bummer but it is an expense. Does not deter me from buying and selling shares. If I had not bought and sold them I would not have made 45% profit in 3 months on those shares. Stamp duty is the same, did not stop all those people buying homes, they did not like it but still bought. Houses… Read more »
Biker
Guest

“…Biker Pete among this festering pile of turds…”

Your anger is a great deal of comfort to me, as I lie broken-necked beside my motorcycle, bleeding from the cancerous curses you’ve inflicted, Shoes.

Amazed yer missus permits you near the kids, son.

You’re ill.

Ned S
Guest

“it is not a “double” tax” – If it isn’t a double tax then it sure as hell FEELS like one Shoes! :)

Ned S
Guest

I didn’t get the feeling Gavin was down on stamp duty because of any potentially downwards pressure it put on housing prices Shoes – Rather that he just had issues with the tax itself. (Discourages people from selling up, moving on etc.)

Ned S
Guest

Vera Lynn – Born 1917. 94 and not out. Though a bad time to snick one into slips as they say – Good luck to the old girl!

Davo
Guest

Stamp Duty was going to be one of those taxes abolished by the introduction of GST in 2000.
What happened??
Think we all got screwed over again.

Ned S
Guest

“Think we all got screwed over again” – You aren’t suggesting that pollies who introduce a new tax and tell the mug punters they’ll be compensated can’t be trusted are you Davo? :)

Gavin R. Putland
Guest
Biker: The switch from stamp duty to CGT would protect the tall poppies from a price crash. Moreover, if the States get a cut out of uplifts in land values, they have an incentive to invest more in infrastructure that causes such uplifts, so that the owners get more capital gains (http://lvrg.org.au/). So a State-level CGT isn’t about cutting down tall poppies. But it *is* about efficiency and fairness — “beneficiary pays” and all that. Ned S: Yes, income tax plus CGT is double taxation. The solution is to get rid of income tax. :-D Stillgotshoeson wrote: “Ned your argument… Read more »
Dan
Guest
Greg’s article is basically right. Buildings (houses) have a basic productivity (they provide physical protection and a place of rest for people who work) but there is not much scope for increasing their usefulnes. They are overpriced, since for the same money you can get a better quality building in a better area in, say, Europe. However regarding residential land (which people say is too generously apportioned in Australia) there is a big difference, and the opportunity to probably double our food _productivity_ if people just replaced their flower beds and ornamental conifers with fruit trees and a few veggie… Read more »
Ned S
Guest

“Yes, income tax plus CGT is double taxation. The solution is to get rid of income tax” – The best solution for some might be to get rid of income tax (on wages) and up CGT Gavin. But as I doubt the ATO is going to send me a big cheque with a covering letter any time soon saying Dear Ned, we were wrong to tax your wage all your life and hereby refund the money so you can pay the higher CGT, I doubt it’ll be the best solution for me!?! :D

Gavin R. Putland
Guest

Ned (seriously now): In your position, it’s better to pay tax on capital gains than to make capital losses. And if property values crash, capital losses won’t be confined to property, but will spread through the financial system to other asset markets…

Ned S
Guest

If guv want to stop any property crash Gavin, Biker’s long running suggestion that they just could make interest payments on the home tax deductible could be a goer?

As to the rest of stuff re stamp duty and tax generally I’m reasonably comfortable with what the Henry tax review recommended overall. (Although am a bit undecided about the idea of doing away with neg nearing on housing once the “housing shortage” is resolved – I think that’s what he was suggesting?)

Biker
Guest
There has been no stamp duty for FHBs in WA for the last four years, Gavin: “WA First Home Buyers will get a full exemption from conveyance duty on homes up to $500,000 and vacant land up to $300,000. Those buying houses valued between $500,001 and $600,000 will receive a partial exemption. A partial rebate is available for vacant land valued between $300,001 and $400,000. These thresholds came into force on 9th May 2007.” Greg Costello (Curtin University) has studied the effects of that policy on the Perth property market. Costello’s research confirmed that: “…the introduction of reduced stamp duty… Read more »
Ned S
Guest
“Because this was all done _within_ Super there was no CGT to pay at all” – But Biker, super funds have to pay 10% CGT surely? Oh, unless you are over 60 yo in which case you pay no CGT maybe??? But surely that isn’t ‘fair’? But then maybe the fact that know nothing knuckle draggers with riggers tickets can earn three times the yearly average at $220K pa now when highly over edumacated types like me could maybe only earn 20% above the average “when I was a boy” wasn’t ‘fair’ either??? Hmmm – Is any of this telling… Read more »
Biker Pete
Guest
Ned, if you elect to go for indexed funds (shares), within a TTR, you not only don’t get whacked for tax _while_ your money’s working, but also when you transfer back and forward between cash and shares (making a profit, hopefully, as we did, a couple of times) you don’t get whacked _then,_ either. And remember, the magic number is 55… not 60. Online access to infinitely tiny tweaks of up to six super accounts, all within the same company, meant we could juggle (on a daily basis) when necessary. At the very height of our Salpack contributions, when we… Read more »
Ned S
Guest

Thanks Biker – It’ll take me a while to digest some of those points I suspect.

As to “Many here scoff at Super” – I’ve actually been tossing around the thought of going more heavily into it. While housing is the bulk of the wealth for many of our generation, super simply makes up a larger proportion of the wealth of later generations.

So as we move forward I suspect pollies in a democracy just could become tempted to support super more than housing?

Biker
Guest
“…I suspect pollies in a democracy just could become tempted to support super more than housing…” In fact, Costello’s* initiatives really have done that. Capital gains concessions may be generous, but the current Super provisions permit a haven from taxes _well_ beyond concessions for property and shares. I’m amused sometimes that property bears expend so much energy fighting NG and CGT provisions, without realising that Super conce$$ions may be (with a little effort expended) far more productive vehicles in flat years and safer than any of the asset classes. :D * Costello always grated with me… a little too smug.… Read more »
Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype

Oh Dear Biker Pete giving advice ?

Do you still think you earn 7%plus tax free on funds you put into a mortgage offset account? What a simpleton!

As for your claim of buying quality property assets? Under $300K land quality assets! Oh please are you retarded?

Ned S
Guest

“Your gains _might_ just match inflation”

Average return on super of 3.3% pa over the last decade for the set and forget types in funds with more than 4 members (which basically means non SMSFs I think?) probably does just pretty much match inflation Biker:

See Table 13 of following: http://www.apra.gov.au/Statistics/upload/June-2010-Annual-Superannuation-Bulletin.pdf

“Under $300K land quality assets! Oh please are you retarded?” – That’s a bit rich coming from a bloke who owns a $700k home and covets a $2m one Fool. Unless there’s some 24 carat tapware in both places I can only assume the bulk of the ‘value’ is in the land.

Biker Pete
Guest
The current perception is all N Fool owns is a home in Mandurah, Ned. He referred to it as “…a DHA south of Perth…” in previous posts. Note that he was very specific about the other five he ‘owns’: Woodvale and four in Karratha…. both areas doing well. Mandurah is in a slump, so he carefully avoided mentioning a specific location for his actual domicile. It appears to us he wants out of Mandurah badly, but Perth is too rich for his blood. That won’t stop us referring to his imaginary six-property claim each and every time he bags WA.… Read more »
Biker
Guest

Meanwhile on a very positive note, will technology move as quickly as Corning suggests here? I think it will:

http://www.youtube.com/watch?v=6Cf7IL_eZ38

Hope your DL speed can handle it… .

Dan
Guest

Okay, laws aside, Super for most people is trusting some man in a pinstripe suit. Unless you are managing it yourself, I reckon it’s better to pay some taxes and otherwise be in control of what little you have.

Biker Pete
Guest
“Super for most people is trusting some man in a pinstripe suit.” Agreed. We fired _two_ FAs for that very reason. We also fired one of our Super companies around a decade ago, when Duty of Disclosure laws were introduced and we forced that fund to divulge its ridiculous fees and trailing commissions. These days, you can ‘manage it yourself’ online, simply. “…be in control of what little you have…” If you have little, that may well be true. But, can you think of anything else which can, without any effort whatsoever, cut your PAYE tax from 40%+ to 25%,… Read more »
Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype

Hey Biker tell everyone how you posted on Perth Now that WA was the only state offering a discount on stamp duty (Moron)

Better still explain how I can earn 7% plus interest tax free in a offset account?

After you do that get back to Biting Your Own Neck!!

Biker
Guest

Hey, N Fool, tell everyone you posted on PerthNow there were no queues for rental properties in Perth, while Friday’s West Australian 8th April 2011, (p. 3) says, under the banner “Tenants queue for properties” that “…up to 70 people at a time are queueing for rental properties, in some cases offering $50 above the weekly asking price…”

Moron? I prefer the description of your mindset, posted by Peter Fraser recently on Money Morning Australia, which fits you to a T, N Fool: “… mildly amusing idiot(s)…”

Biker
Guest
Introducing The Fool: Money Morning, February 13, 2011 at 3:53 pm “Kris, I live in Mandurah WA and the property market is on the brink, not that many of the locals realize this. Oceanique development is only partially sold and discounts of 40% offered still make them over priced. This weekend I went with a friend to view some display homes and was horrified to see a laminated newspaper headline stating House Prices set to SOAR. On closer inspection it was found to be dated October 2010 and the article was from a VI spruiker. This tells me that the… Read more »
Don
Guest

It was a nice courtesy of you Biker but unfortunately google reveals all :)

Ned S
Guest

At least he’s holding his bowel motions together well enough that his abuse (simpleton … retarded … moron) remains coherent this weekend.

Philoz
Guest

Haven’t some of you blokes got something better to be doing with your time? Seriously, the crap comments that go round and round on DR week in week out are staggering. For those who have bikes, why don’t you ride the bloody things? If I had more time than I do now I wouldn’t be sitting around trying to being clever on forums co-opting them with the same incessant drivel I would be on the road enjoying life.

bob
Guest

Philoz. Agreee, basically gave up reading any egoic comments by Ned & Biker. They are usually off topic, offer little that is constructive and are so myopic they fail to see that communities win through co-operation. To the minority housing is a tax shelter rather than shelter for families – a mindset that is simply feudalistic. Evolution proceeds in fits and start for the whole and for the individual. I guess they are excused for that reason.

Biker
Guest
“…offer little that is constructive…” An amusing comment in a forum which is centred on identifying negatives about the Australian economy on a _daily_ basis, Bob. From their first issues, DRA and MMA have repetitively launched WMDs at Australian housing and our banks, on a daily basis. Those who challenge these attacks are often vilified by _other_ recent new arrivals who left their own countries, ostensibly looking for a new start, but want it all… and want it all NOW… and never cease complaining about their newly-adopted country. These trolls feast on every tiny negative or pessimistic scrap of news,… Read more »
Pete
Guest

@Philoz and bob

Unfortunately those two have taken this site to be their very own little chatroom.

Blame the moderators for letting it get to this state. Most of the real commenters left the site a few months after Ned and Biker arrived.

Biker Pete
Guest
I’m sure you’d prefer free rein to heap excreta on the Aussie economy, particularly our banks and the property markets, Pete. A contrarian view to the contrarian view should be blocked, in your ‘me-too’ responses to the whinge-a-lot crew, perhaps? ;) I was an active recipient of DR long before DRA existed. I can actually remember the very first comment of yours I ever read. In it you rejoiced that realtors hadn’t been able to update their cars that year(!) Blame the moderators? The moderators frequently remove my contributions. It was your incredibly shallow comment that fully-activated my participation in… Read more »
Biker
Guest
“…blame the moderators…?” I’m sure you’d prefer free rein to heap excreta on the Aussie economy, particularly our banks and the property markets, Pete. A contrarian view to the contrarian view should be blocked, in your ‘me-too’ responses to the whinge-a-lot crew, perhaps? I was an active recipient of DR long before DRA existed. I can actually remember the very first comment of yours I ever read. In it you rejoiced that realtors hadn’t been able to update their cars that year(!) Blame the moderators? The moderators frequently remove my contributions. It was your incredibly shallow comment that fully-activated my… Read more »
peterg
Guest
BP there is a little bit of pissing contests in the comments though, for the writer’s amusements and ego’s. not complaining, I take it all for what its worth and ignore what I wish. btw I hope all those pretty glass displays are self cleaning, else glass cleaners is going to be a boom industry, or display gloves. it’s still Leonard Coehn’s getting lost in that hopeless little screen AFAIC. “…hat mortgage payments on an average first home loan have gone from taking 40 percent of after-tax income of the average worker in the 1990s to 64 percent now.” so… Read more »
Biker
Guest

Stay clean and green, mate! Keep that black stuff outa your forest, too.

Doubt this will get through. Last two didn’t!~ :D

Biker
Guest
Hola!~ I’m sure you’d prefer free rein to heap manure on the Aussie economy, particularly our banks and the property markets, Pete. A contrarian view to the contrarian view should be blocked, in your ‘me-too’ responses to the whinge-a-lot crew, perhaps? I was an active recipient of DR long before DRA existed. I can actually remember the very first comment of yours I ever read. In it you rejoiced that realtors hadn’t been able to update their cars that year(!) Blame the moderators? The moderators frequently remove my contributions. It was your incredibly shallow comment that fully-activated my participation in… Read more »
Ned S
Guest
There’s plenty of meat in the article and the comments for either of you to comment on constructively Philoz and Bob. The price of housing, a correction in same that could well have begun, our taxation regime in general and in relation to housing in particular, whether housing is “productive”, and if it isn’t then what is and why, Super – with that being of relevance to most Aussies these days, plus also a vehicle through which housing can be acquired. And Yes, if anyone thinks that housing is simply “shelter for families” in this country they are obviously badly… Read more »
Ned S
Guest
“Most of the real commenters left the site a few months after Ned and Biker arrived” – Pete left this site when: * His prediction of anywhere up to a 70% collapse in housing (more even?) didn’t eventuate, and * Steve Keen capitulated and went ‘walkies’, and * Pete’s assessment that his Mum was unwise in not following his advice re her housing investment started looking iffy, and * Some of the commentors on this site had a bit of a giggle about the overall situation (as much as anything else out of relief in a lot of cases I… Read more »
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