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Are rising Australian home prices good the economy?

February 7th, 2011 · Greg Atkinson · 55 Comments

Often lost in the debate about house and home prices in Australia is the discussion regarding if our national obsession with housing is good or bad for the overall economy.  Instead of rejoicing that residential real estate prices in Australia rose during the global financial crisis, maybe we should be looking a little closer at why prices are rising to see what problems this might be causing.

I am not going to touch on the subject of whether Australian home prices will rise or fall in the short to medium term or if housing is a good investment or not, since much of this has already been previously covered in a variety of articles which can be found on the Australian House Prices and Real Estate Discussion page of this site.

What I will focus on instead is the question: are rising house prices in Australia good for economy.

Many people would probably say the answer is obviously yes and that of course rising home prices are good for the economy because they create wealth.  In addition many would would point out that a home is a safe investment and as the value of the home rises, it creates equity which in turn people can use for a wide range of purposes including investing in the stock market.

So it’s a win-win situation right?  Well perhaps not quite.

Firstly the reason people can afford bigger and better homes is not only due to rising wages and productivity improvements but also because of rising levels of household debt.  Many economists don’t see this as a major problem because this debt is against an asset (i.e a home) which should rise in value and therefore, generally speaking, will keep household net debt under control.

But this sort of thinking is what caused a lot of pain during the global financial crisis and sent many investment banks and companies under.  Some very ‘smart’ bankers figured that they could deal with high levels of debt because they would simply pay the interest off using the income stream generated by asset and then at some point, also make a tidy profit by selling off the asset itself.

But as we know this didn’t quite work out for the likes of Babcock & Brown and a whole range of other companies. Indeed many property developers have also failed or hit hard times in recent years despite a rising population and a supposedly robust economy.

The important thing to remember about debt is that it doesn’t go away until you have paid it off and if the value of the asset you borrowed against goes down in value, then you can be in serious trouble.

But that is unlikely to happen to Australian house prices right?  Maybe, maybe not, but most people appear to believe that over the long term (10 years plus) that they will see the value of their home or residential investment property rise.  They are in fact, counting on it.

We can see how this belief is playing out in terms of household behaviour by looking at Australian household debt levels as per the chart below.

household-debt-1980_2010

As we can see from the chart, from the early 1990’s Australian’s started taking on bigger loans and as a result household debt levels as a percentage of disposable income have soared.

But on the plus side the value of the homes people have borrowed against have also risen so maybe all is well?  Many property bulls would also point out that Australian households are wealthier than ever before and so if house prices continue to rise then the good times will continue to roll on.

That line of reasoning would not worry me so much if household savings were also rising, but that is not the case as I discussed in: The unbalanced economy and household savings in October 2010.

A little more worrying is that productivity gains across the Australian economy have pretty much stalled and inflation is rising.  This means that the nations ability to earn more is flat-lining while at the same time the cost of living pressures mount.

The family home for most people will be the biggest single asset they will ever own and so strong is the belief that it will deliver a capital gain, that national house prices kept rising even during the global financial crisis.  In others words, not even a global economic crisis could undermine the confidence Australian’s have in the housing market.

On the surface this would appear to be a good thing. The resilient Australian economy weathered the global economic turmoil of the last few years and despite house prices falling across much of Europe, Japan and in the U.S, the housing market in Australia powered ahead.

But let’s not forget that all the money flowing into housing is essentially going towards a somewhat non-productive asset.  True people need shelter, but across Australia there is a significant amount of over investment in the housing market.  Hundred of billions of dollars are tied up in homes that have more rooms than are needed and in improvements such as swimming pools and  BBQ areas etc.  Then there is also a small fortune tied up in holiday homes which are often vacant for most of the year.

Bigger houses, swimming pools and holiday homes don’t do much to increase productivity or make the economy better able to compete in the global market place.  Yes they do make people feel wealthier and yes technically they are assets, but no economy anywhere in the world has ever secured it’s long term economic future because it had the nicest or most expensive homes.

This leads me to wonder if rather than rising house prices being good for the economy they become at a certain point, a barrier to further economic growth and productivity gains.  If so, are home prices in Australia now near or at that point?

As a nation, are we simply taking the proceeds from the commodities boom and essentially over investing it in residential property? Perhaps over the last decade or so Australian’s have essentially become use to a lifestyle that will become increasingly difficult to maintain if commodities prices enter an extended period of price decline?

Even more concerning is that perhaps rising house prices are masking weaknesses in the economy we don’t see, or don’t want to see.

I don’t pretend to know the answers to these questions, but I believe that they are the sorts of questions we should be asking ourselves and that our policy makers should be looking at as well.

Let the discussion begin now!


55 responses so far ↓

  • 1 Biker Pete // Feb 7, 2011 at 3:38 pm

    Not only is the home the largest investment an Aussie is likely to make, an Aussie’s home remains his castle. It’s a refuge from the harsh Aussie climate, a place he/she can develop; relax-to-the-max; even escape from CGT. No wonder there are so many TV programs dedicated to the many facets of home ownership… .

    In aspirational terms, it’s an incredible ‘driver’ of middle class Australia. True, there’s a small number of petrolheads who derive their status from HSVs and FPVs, but most tend to outgrow the phase.

    Traditionally, we’ve traded up every five years or so. The data tells us that’s now 7 – 8 years. Many reasons for that, including the GFC. To attempt to assign the blame for stagnation in other sectors _may_ be stretching it. Housing remained relatively immune, in a world of pain in other a$$ets.

    Each time we’ve built a home, we’ve felt a great sense of satisfaction, assisting the construction industry. If, as it’s claimed, the ACT’s economic primacy is due to construction, then it’s time we were awarded an OAM, the Outstanding Accommodation Medal, for services to Australia’s economic growth!~ 😉

  • 2 Barry Lind // Feb 8, 2011 at 1:28 pm

    The fact that the media is focused on housing is probably a bad sign. It would be interesting to know how much money spent on building homes actually stays in Australia and how much ends paying for imports or in the hands of foreign owned companies.

  • 3 Biker Pete // Feb 8, 2011 at 3:42 pm

    If construction is our third-largest industry, its role in keeping unemployment low (and the tax base higher) must be significant.

    Good sign? Bad sign? The media grasps at every minor portent of d-o-o-m or b-o-o-m. Conflicting data is often printed on the same day, in the same paper(s).

    The current slowdown in residential construction is viewed by some as a sign that the housing market is in deep trouble; by others that the oversupply following the FHOGs is over… and prices (and rents) are about to jump.

    Ultimately, for each individual, the truth becomes apparent when we attempt to buy… or sell. 😀

  • 4 Greg Atkinson // Feb 9, 2011 at 4:36 pm

    Biker the main question I am trying to focus on is not if the housing market is going up or down but rather if it makes sense for the nation to be pumping so much money into residential property in the first place.

    As a nation, how do we expect to earn a return on our investment in housing?

    For example is there a link between bigger and more expensive houses to productivity or are we simply over indulging ourselves during a period of relatively good economic growth?

  • 5 Biker Pete // Feb 10, 2011 at 11:20 am

    “…is there a link between bigger and more expensive houses to productivity…”

    I doubt it’s relevant, Greg. You may recall our experiment ‘downsizing’ our last rental. Took longer to rent than any of our 4X2X2s. People know what they want… and are prepared to pay more. In this case, a 3X2X2 earns $35 – $65 per week less.

    Does it make “…sense for the nation to be pumping so much money into residential property…”

    Well, after food and water, shelter does seem to be next on the hierarchy of needs. It made a lot of sense to us the first time we saw extensive cardboard shanties and whole communities living under bridges, while travelling. It made sense when we saw 16-20 people crammed into tiny mud/straw homes, too.

    Funny thing about Aussies: It’s pretty difficult to explain to them their choices are wrong. Seem to resent it for some reason. Where are Adolf, Mao and Joe when you need ’em?! 😉

  • 6 Barry Lind // Feb 10, 2011 at 12:39 pm

    Biker I think you are missing the point of the questions being raised. The post is not asking if housing is good for people, if people need houses or if people want houses.

    “…is there a link between bigger and more expensive houses to productivity…”

    Seems like a valid question to ask when talking about housing and the economy.

  • 7 Biker Pete // Feb 10, 2011 at 1:52 pm

    Recalled Greg’s comment, well over a year ago, in which he noted: “Ned as you know I have been rambling on about the Oz economy being too focused on mining and farming for quite some time.” (Nov 7, 2009)

    OK, here’s a ‘new’ focus for us: construction. Claimed to be our third largest industry, it’s ahead of manufacturing, tourism and education.

    The problem with our analyses of the productivity of each is that we (all) bring our biases to the fore. If you’ve a beef with negative gearing, for example, you’re hardly likely to support any argument that bigger homes lead to increased productivity. (And if a vegetarian, you’ll cite cow flatulence as an argument against the beef industry.)

    Is our military ‘productive’? Well it certainly promotes leadership. And, at times it illuminates lack of leadership.
    Should we downgrade the importance and funding of our military, due to its lack of ‘productivity’?

    Seems quite a circuitous path we’re on, here… . 🙂

  • 8 Greg Atkinson // Feb 10, 2011 at 9:13 pm

    Biker in the post I am focused on housing and the economy, not the budget process so I am not sure how military fits in here.

    Anyway digging trenches and then covering them over again will help employ people, make some companies happy and contribute to GDP….but is it the smart thing to do? Will it benefit the economy over the longer term? I don’t think so.

    So a lot of activity in the housing sector does not necessarily means it’s good for the economy over the longer term as the Irish have found out the hard way.

    I am not suggesting we don’t need to be building houses or have a viable housing construction sector, but why are we building bigger homes when the number of people per household is declining? Does that make sense? Is it a wise allocation of resources?

  • 9 Biker Pete // Feb 10, 2011 at 10:01 pm

    “…why are we building bigger homes when the number of people per household is declining? Does that make sense? Is it a wise allocation of resources?”

    It’s a sociopathic characteristic of the Aussie psych!~

    I get a real buzz when people enter our (main) home and experience the novelty of California/Balinese lifestyle complete with thirty foot ceilings and mezzanine. Yep, it’s a character flaw! We really do have this my-house-is-my-castle syndrome… hence the wonderful irony of the film of that name…

    It makes no sense at all… but probably more than the thrill of Porsche or Maserati ownership. We could afford almost any car on the planet, but there’s no thrill at all. We get a lot more buzz from a fast bike.

    We tried the smaller house experiment. We’d make about 12% on that experiment if we sold that house right now. We either misread the market, or we mistimed it. In the long run, it may well be the right path… .

  • 10 Greg Atkinson // Feb 11, 2011 at 9:10 am

    It seems even the RBA might be worried about the high level of household debt according to this piece in the SMH today: Household debt high, RBA says

    According to this article: “The debt to income ratio here back 20 years was low by the standards of developed countries, now its certainly up there with the ones that are high,” Mr Stevens told the House of Representatives Standing Committee on Economics on Friday.

    Where is most of this borrowed money going? Housing!

    So this will get interesting. If the RBA lowers rates too far they will encourage people to borrow to buy a home and worsen the household debt situation, but if rates stay high then it will hurt businesses and households with loans.

  • 11 Biker Pete // Feb 12, 2011 at 7:04 pm

    “If the RBA lowers rates too far they will encourage people to borrow to buy a home and worsen the household debt situation, but if rates stay high then it will hurt businesses and households with loans.”

    Yes, it’s interesting, all right.

    If I didn’t know better, I’d be tempted to think property investment might be a good thing!!~ 😉

    I listened to Stevens’ whole address while motoring out to pick up a tray-load of plants. You can’t rule out the psychology of any market; and the RBA’s blunt instrument is a poor weapon-of-choice. A breakfast spoon might be better: “Too hot, too cold, just right!” Nor can you exclude the political frame. Hot and cool media respond quickly and ruthlessly when blunt weapons defy the surgeon’s primary rule: “First do no harm…”

  • 12 Barry Lind // Feb 16, 2011 at 5:14 pm

    Biker I don’t think bigger home sizes are connected to productivity at all. Higher profits at companies that supply materials used to build houses is not a sign of increased productivity either.

  • 13 Biker // Feb 16, 2011 at 9:13 pm

    Completely agree, Baz. Reminds me of that British comedy line: “When I was a kid, fifteen of us were crammed into a shoebox!”
    Astonished comeback: “You had a SHOEBOX????!!”

    What we should all do is rent, or stay with mum’n’dad into our seventies and inherit the family home, or seek the luxury of a SHOEBOX!!!~”

    When I first read the question: “Are rising Australian home prices good the economy?” I thought it really didn’t make a lot of sense… and suggested altering it. Greg agreed it might need some attention. I was thinking it could be modified to “When the heck are Aussie home prices going to correct?” or “HTF am I ever going to buy a house?” or “Are Aussie homeowners and banks bleeding Aussie businesses dry?” but, as you know, I’m far too polite to ever say so.

    This question is probably one of those eternal imponderables, like: “Why is an orange?” or “If a tree falls in the forest and no-one is around to hear it…” or “Since light travels faster than sound, isn’t that why some people appear bright until you hear them speak?” 😉

  • 14 Greg Atkinson // Feb 17, 2011 at 5:36 pm

    Biker the article I posted or the comments so far don’t suggest people should rent a home instead of buying.

  • 15 Biker Pete // Feb 18, 2011 at 11:10 pm

    Having a lot of rentals, we’re not bothered either way, Greg. About to fly a house we paid $375K for, at $650K. It has returned us around $180K in rent. May take a few weeks to sell… or it may sell in three days.

    Having covered three aspects of the market (land, rentals, construction) during three different peaks and troughs 2007 – 2011, we think we’ve generally made very wise choices. One block (high, great water views) bought right at the peak still owes us $20 – $30K*, but two purchased at the very bottom more than compensate. Our most recent sale repaid that on-paper loss doubly… .

    Not bothered by any negative sentiment. Been there, done that twice before… 😀

    * Interest…

  • 16 Greg Atkinson // Jun 3, 2011 at 8:56 am

    It appears house prices are getting a lot of media coverage again lately. The general feel of most articles is now negative and we even have senior bankers now expressing their concern about negative gearing.

    Here is an extract from an interesting online article published today:

    ONE of the nation’s most senior bankers has taken aim at the negative gearing used by millions of property owners, claiming the tax break was leading to an unhealthy focus on housing as a means to get rich, while pushing property prices to unaffordable levels.

    ANZ Bank’s Australian boss, Phil Chronican, also cast doubt on property as an investment class, saying all the substantial property price gains over the past two decades are unlikely to be repeated and compared with other forms of investment, housing looked ”weak”.

    Read more: http://www.smh.com.au/business/negative-gearing-unhealthy-says-anz-boss-20110602-1fiz8.html#ixzz1OALEpRIM

  • 17 Ned S // Jun 4, 2011 at 12:27 pm

    “we even have senior bankers now expressing their concern about negative gearing”:

    Neg gearing is a messy one. Lots of things could be done to get lower housing prices in the country. (Drop the FHOG; Crank interest rates up; Tell all the ladies we are going back to pre-feminist days and they’ll be stay at home mums 🙂 etc ) But going after neg geared investors is probably the most politically acceptable one – To the extent that approach (and even lower house prices in themselves?) might actually be politically acceptable???

    “compared with other forms of investment, housing looked ”weak”

    I think he could be being overly optomistic in regard to ‘other forms of investment’ Greg. The issue that has to be faced across the board in the developed countries is the simple demographic one that boomers and gen X will be selling down their assets over the next 50 years to fund their retirements. So we are collectively going into a draw down phase as opposed to an accumulation phase across all asset classes. (Which makes India worth a look for investors possibly? As I gather its demographics are different.)

  • 18 Ned S // Jun 4, 2011 at 2:54 pm

    Are rising Australian home prices good for the economy?
    (Where one obviously means the Oz economy) – You do ask some doozies mate! 😀

    * Are rising food and energy and water and clothing and furniture and jewelry and pharmacuetical and computer prices good for the economy? (Not that computer hardware prices are especially going up I guess?)

    (The RBA seems to think so, to some extent anyway, given that it targets positive inflation.)

    * To what extent do one’s answers depend on whether the items are “Made in Australia”?

    * Is increasing debt good for the economy?

    (Yes, providing it doesn’t become unsustainable would seem to be the consensus answer of the powers that be?)

    * To what extent does one’s answer depend on whether the debt is owed to other Aussies as opposed to foreigners?

    * Why do we borrow money from foreigners? (After all ‘money’ is just some gov’s promise to pay isn’t it? And presumably the Oz gov can print as many ‘promises’ to pay as any other gov? Do we trust other gov promises to pay more than Oz gov promises to pay? What’s the story???)

    * Are rising BHP and CBA and Woolies and Telstra share prices good for the economy?

    * To what extent do one’s answers depend on how much Oz ownership there is of such companies?

    * Where do taxes fit in all of this given that it probably is easier to extract taxes from the housing industry than the miners for instance? (With housing being a domestic industry that doesn’t have to compete internationally in the way that mining does.)

    * What makes one asset class ‘productive’ and another ‘unproductive’?

    a) in general theoretical terms? and
    b) specifically in terms of a localised national economy?

    Lots of questions there. But come up with an answer to the last one, bearing in mind the ones that preceed it (plus a host of others I’d guess?) and one might start to get a bit of an idea perhaps?

  • 19 Ned S // Jun 4, 2011 at 3:20 pm

    Plus one also needs to ask if we should be aiming for some sort of ‘balanced’ economy long term perhaps? Or more relying on an ability to have our national economy restructure as the broader global economy changes.

    Just as really general to the question of whether rising house prices are good for the economy, perhaps the answer is “Yes, to the extent they accurately reflect risk and return levels and No, to the extent that they do not”???

    But with the ‘productive/unproductive’ issue having to be considered – As the Stoic might have chosen to say to the Epicurean? 🙂

  • 20 Biker // Jun 4, 2011 at 7:19 pm

    Ned: “…going after neg geared investors is probably the most politically acceptable one – ”

    Disagree here, Ned. We are no longer personally affected, but with one-in-seven families owning (at least) one investment home, I’d say a 14% backlash might be significant one, especially as Labor is holding power on a knife’s edge.

    Yes, the Greens would abolish negative gearing, but I think it’s likely swinging voters would abolish the Greens… . 😉

  • 21 Ned S // Jun 4, 2011 at 7:39 pm

    It’s more politically aceptable than telling the ladies we are going back to pre-feminist days and they are all going to get to be stay at home mums again Biker … 🙂 (Or doing away with the FHOG or upping interest rates a lot – With those being other options.) It’s just the most potentially acceptable alternative out of a whole bunch of alternatives. NONE of which may prove to be acceptable in any way at all. Which is why it’s getting pushed I suspect?

  • 22 Senator13 // Jun 4, 2011 at 9:58 pm

    On a side note – I would like to see the stats of how many Green voters are negatively geared! I suspect it is pretty high!

  • 23 Biker // Jun 5, 2011 at 10:20 am

    Remember that the WA Libs _haven’t_ implemented a FHOG, Ned.
    Barnett figures the construction boom in mining will take
    up the slack as residential construction grinds to a halt.

    Helps explain why home construction has fallen much more in WA
    than any other state.

    Large developers like Satterley, whose partnership with state
    government is affected, appear to have taken up the same cry as Barnett and Chronican:

    * Homes should be affordable, ie., three bedroom one bathroom,
    carport. Government will lend you a fifth (cheap version of
    shared equity…)

    * Investment in real estate is (suddenly) immoral, financially
    unproductive.

    You’ll recall that our last (three bedroom!) project was not
    popular with tenants, despite two bathrooms, larger bedrooms and double, secure garage. Rent is $25pw lower than any of our other rentals. It’s not a winner and only youngsters who
    want to drive a very long distance to the new Satterley Solution will buy it.

    We see rents rising steadily as the state government ignores housing needs while WA’s population rises. Not particularly ethical of us, but we can live with that… . 😉

  • 24 Greg Atkinson // Jun 5, 2011 at 10:21 am

    Ned I don’t see much in common with a domestic market (like housing) and a global market (energy) to be honest. Besides we know that generally speaking, rising energy prices are not good for any economy except those which can export much, much more energy than they import. (Norway being a good example)

    Housing is a market where governments at all level get involved and their actions effectively move prices. So this is why I ask if rising home prices are of much benefit to the overall economy.

    If not, then why does the taxation system for example effectively encourage people to gear into property? Why do we have first home buyers schemes at all? If the government wants to hand out money then why not lower HEC’s fees for certain degrees since we know education tends to help drive productivity growth?

    Generally speaking I am not a fan of rising prices for much at all since in many Western nations this has been driven by debt. Seems pretty crazy to me for economists and others to talk about how wonderful an economy is tracking because GDP is growing on the back of increasing debt.

    So to finish off I would say this: if house prices are being pushed higher largely because of increasing debt levels then I would say this is bad for the economy.

    This doesn’t mean investing in real estate is bad or should be discouraged. It’s just an observation/conclusion of mine which nobody in their right mind should listen to 🙂

  • 25 Ned S // Jun 5, 2011 at 11:11 am

    “Homes should be affordable, ie., three bedroom one bathroom,
    carport” – Over this way at least Biker, the affordability issue is all about the land rather than the house. An extra 16 m2 for a second garage, 10 m2 for a 4th BR and 6m2 for an ensuite wouldn’t add any more than $30K to the cost even once the builder markup goes on I’d guess? With that being well under 10% of the total price on most places.

    Oh, I missed the “carport” reference (as opposed to garage) – Hmmm … Not sure many would be happy with that these days?

  • 26 Ned S // Jun 5, 2011 at 12:48 pm

    “This doesn’t mean investing in real estate is bad or should be discouraged. It’s just an observation/conclusion of mine which nobody in their right mind should listen to :)”

    Fact is, very little of our economy is productive that I can see Greg – By and large it’s way more about encouraging domestic consumption than anything else. On debt if necessary. With housing being a biggy in that regard. Must admit that I simply don’t know what is “good” for the economy. Or what is productive and what isn’t from an economic perspective.

    I guess the smarties must have some idea. I certainly get the feeling at this time that they are happy to see the balance shift from to less debt and more saving in household balance sheets at the moment? Partly because they think it is going to be offset by expansion of debt/investment in(?), and as a result, higher earnings generated by the mining sector?

    The world seems seriously crazy when one considers debt and where it fits in though – We went from having a “global liquidity glut” (I’m sure you’ll remember THAT term being bandied around! :)) only about 2004/2005/2006 as I recall, to large numbers of debtors not being able to meet their payments or get finance in 2008.

    The conclusion for anyone who assumes there is some sort of ideal balance between debt and saving (which I think I do? – with the debate about whether some debt is more potentially productive than other debt also needing to be considered I’d guess; along with the fact that balance can change – to some extent anyway?) is that those in charge of issuing the debt and encouraging the saving stuffed up. With it yet to be seen if they’ve learned anything really useful perhaps?

    On one level it seems perfectly reasonable to agree with your logic that high house prices potentially divert money from other more productive areas of the economy (even though I’m still at a bit of a loss to define what’s productive and what isn’t – Heck, even on the education score that you mention, I’m tempted to think that a huge amount of education people get truly isn’t productive?), there is absolutely no guarantee that if one could stop people putting their money into housing, they’d necessarily choose to put it into anything more productive. Or even save it.

    Though the positive just might be that they could have less long term debt – To the extent one sees that as a positive. As while I think policy makers reckon that would be a positive at the moment, I very much doubt they want to see us with no long term debt either? It would be extremely interesting to know what their “targets” are re balances between debt and savings going forward. (I assume they have some – For households, business and gov? Post GFC they should even if they didn’t before the GFC maybe?) And their rationale behind those targets.

    I’m rambling I guess. But just as a related example – A mate of mine who has travelled fairly extensively in Europe commented to me once that lots of Europeans rent and because they aren’t paying off houses that means they can spend more of their income on lifestyle type things – My mate was pretty impressed by the ‘general’ European standard of living I think? Though post GFC, that approach doesn’t seem to have been great for the balance sheets of individual Europeans, their banks or their govs either. Though maybe a lot their problems can still just be laid at the feet of their banks having invested in other nations’ housing?

  • 27 Biker // Jun 6, 2011 at 11:38 am

    Greg: “Why do we have first home buyers schemes at all?”

    Your comment jumped off the screen at me, Greg! 😀

    I guess the rationale is that governments are _perceived_ to have some responsibility for provision of accommodation.
    That’s questionable, of course. We’re not really owed
    homes by anyone, government included.

    And one also has to ask how responsible is government when new, far-flung subdivisions are approved, without real consideration for transport and other services.

    I wear three hats here:

    As a landlord, I win if governments do nothing whatsoever re FHOGs. In that scenario, rents rise… and our household thrives!

    As a landowner, I gain nothing if FHOGs are introduced. We’re down to one relatively expensive block few FHOs could afford.
    It will sell to elderly downsizers who sell off $1mil+ homes.

    As vendors of homes in the $380 – $450K range, we _may_ win, but not to the extent vendors did on the east coast when FHOGs were introduced in Vic and NSW… and fools rushed in to buy arguably overpriced dwellings. In WA (and this is anecdotal) it appears most couples _built_; hence the plateau in rents for two years.

    When Barnett & Co ruled out FHOGs here, I initially believed they were irresponsible. The grants would have helped families trapped in the rising rental cycle. After a little time, I stopped worrying about those poor b*stards, consoling myself that, with residential construction braking to a halt here, rents would soon be at unforeseen levels. We would cease to be merely _comfortable_ in our dotage… . 😉

    To sum up, in the ‘good for the economy’ thread:

    1.) Is it better that Aussie families can escape the rent cycle and get into their own homes….(?)

    OR

    2.) Is it better that Aussie families pay ever-increasing rents to those who have positioned themselves to gain from government inaction(?)

  • 28 Greg Atkinson // Jun 6, 2011 at 2:01 pm

    Biker there is not much of a link between the first home buyers grants/schemes and home-ownership. I refer you to the research paper: Home ownership in Australia—data and trends – 11 February 2009, no. 21, 2008–09, ISSN 1834-9854 (available via http://www.aph.gov.au/library)

    Note the first point in the executive summary:

    Around 70 per cent of Australian households own or are purchasing their home. The rate of home ownership has remained remarkably stable at this level for over four decades according to data collected by the Australian Bureau of Statistics in its Census of Population and Housing and its Survey of Income and Housing (SIH).

    I am not aware of any first home buyers grant or scheme that has been around for four decades. I think the first one kicked in around 2000.

    So what does the grant do? Well it helps people own a car and have a house, or allows them to perhaps buy a bigger house, but it’s pretty clear that even before the government started handing out dollars that people still managed to own a home.

    It’s a vote buyer and makes the property sector happy (and probably the banks) but that doesn’t make it good policy. In fact one could argue that all it does it push up prices.

    So in short, the evidence suggests that if the FHOG was terminated that home ownerships rates would not be noticeably affected.

  • 29 Biker // Jun 6, 2011 at 3:52 pm

    Greg: “I am not aware of any first home buyers grant or scheme that has been around for four decades.”

    Neither am I, Greg.

    During that two-year period when FHOs were in a _frenzy_ building here, we predicted (with some trepidation) that rents for _years_ to come might flatten. Rents actually ‘fell’. Our sole experience was a property realtors genuflected over… .
    the one a lovestruck agent praised as having ‘street cred'(!)
    That agent anticipated $420 pw. It eventually let for $380 pw…
    The flat rental period lasted less than two years.

    It’s true that I don’t really _know_ how a FHO thinks… but I think I now know exactly how tenants think.

    And I believe you’re incorrect about FHOGs, in WA, anyway.
    Happy to be wrong, if I am. More money for us!~ 😀

  • 30 Ned S // Jun 7, 2011 at 12:55 am

    Greg: “I am not aware of any first home buyers grant or scheme that has been around for four decades.”

    Biker: “Neither am I, Greg.”

    There’s been schemes of one sort or another around for many years:

    * After WWI returned servicemen were offered land grants

    * I recall my dad mentioning blokes who got in on a gov scheme to pay off their home at maybe 10 shillings a week back in the 1950s maybe – They were still paying $1 per week in the 1970s maybe with it looking like a VERY good deal by then. (Not sure what one needed to do/be to get in on the initial deal?)

    * I knew a lady in the late 1980s (a single mum) whose maximum mortgage payments were capped under some gov sponsered deal. Indeed her maximum int rate was capped at 13.5% (is my recollection) even if she ceased to be a single mum/welfare recipient(?) – Which again wasn’t a bad deal when she did and rates went to 18%

    Grants (or whatever one chooses to call them) have been around in one form or another to encourage home ownership in Oz (or development of the bush in the case of the returned WWI diggers) for many years is my general impression? With those three instances I cite simply being the three historical ones I’ve personally heard of.

    The Federal FHOG – I could be wrong(???), but my recollection is that it was specifically introduced to offset the increased costs of home puchase that were envisaged would/had(?) come with the introduction of the GST?

    Though Rudd (and some of his state gov helpers) pretty obviously had their own reasons for upping it in late 2008. 🙂

  • 31 Greg Atkinson // Jun 7, 2011 at 8:48 am

    You are right Ned, there have been various schemes that have come and gone and interest rates have also varied over time. But the WWI and WW2 schemes are a touch outside the four decade timespan discussed in the report. To have an impact on home ownership rates on a national level then it would need to be a scheme widely available and welfare related grants/assistance don’t fit into that category.

    I think the Fannie Mae/Freddie Mac mess in the U.S should serve as a warning to policy makers who think pushing up home ownership rates with government support is good policy.

  • 32 Biker // Jun 7, 2011 at 5:56 pm

    Yes, there were special War Service rates, Ned. My dad’s home loans were fixed at 2.5%.

    Comparison of Aussie banks to FM/FM? HaHa… You are joking, surely, Greg?

    We are going to see The Big Four compete for mortgage business in the second half, but we’d never, ever be so daft as to introduce Liar Loans, those in which lender and borrower knew that the loans were based on outright lies.

    It’s an old Bear premise that because the US misused, abused and R&P credit, we’ll follow them down this twisted path to hell. I’m loathe to make predictions, but in WA I see rents going ballistic. If there are, as I suspect, thousands of BBs added
    to public housing lists, it will be even worse… .

  • 33 Ned S // Jun 7, 2011 at 6:16 pm

    “I think the Fannie Mae/Freddie Mac mess in the U.S should serve as a warning to policy makers who think pushing up home ownership rates with government support is good policy.”

    It’s OK (“good” even from a societal perspective – though other investments could be way ‘more good’ seems to be your basic point?) if they CAN actually pay for them Greg. (AND if the law actually requires them too apparently?) But in the case of the US to some extent at least, it seems they couldn’t? And that the law didn’t always require them to anyway. (Though with that being no great problem to their smart arse bankers who figured such minor inconveniences could be worked round by dumping the risks elsewhere very obviously! 😀 )

    PS: I’m not sure too many nations should try very hard to learn much from America – Except it is extremely unwise to be like America – Unless one actually IS America perhaps? 🙂

  • 34 Ned S // Jun 9, 2011 at 10:32 am

    Fitch is worried it might have gotten its homework wrong … 😀

    “For this reason, Fitch believes any downturn could be significantly worse than the recession of 1991, on which the current mortgage default criteria is based.” :

    http://smh.domain.com.au/real-estate-news/fitch-first-home-buyer-defaults-more-likely-20110608-1fsey.html

  • 35 Biker // Jun 10, 2011 at 12:49 pm

    Our rental agent has 256 applicants for our suburb on her waiting list, Ned. She recommends a rise of $30 per week on our ‘cheapest’ rental. We believe our most expensive will be let for $50pw more, from July.

    We’ve very much relied on instinct for the last year.
    This kind of data, anecdotal as it is, seems to indicate that the rent plateaus are over… and the long queues are back.

    I read a report in API recently, in which a woman who owns _half_ the homes we have, stated her after-tax income had improved by $150K per year in 2009. She claimed this occurred as a result of lower interest rates and rising rents. Initially we laughed at the claim, as it indicates each rental ‘earned’ $30K more per annum!

    We won’t see our accountant until mid-October when we return, but even with higher rents, I don’t believe we’ll see figures approaching hers in 2011-2012. 😀

  • 36 Ned S // Jun 11, 2011 at 4:13 pm

    Very different market over here to where you are Biker. We’ve got 2 years new apartment supply on the market at the moment.

  • 37 Biker // Jun 11, 2011 at 4:48 pm

    QLD has some special issues, Ned.

    The rise of the Ozbuck must have knocked tourism and education to hell… your floods have probably knocked the stuffing out of property, as well as drowning your mines… and your unemployment figures were already around twice ours when we were over in Cairns.

    Our rental agent, perhaps sensing massive increase in rents, has now created a marketing team whose sole purpose appears to be pushing rents up! Normally, we don’t bother about raising ours, so we were astonished to be thanked (and congratulated!) by this new department, for agreeing to raise our rents appreciably.

    Thinking about this since, their strategy may be:

    a.) FHBs are no longer a driving force in WA;

    b.) Residential construction is flagging;

    b.) More and more families will need rentals;

    c.) Demand will not only rise… but if we PUSH rents up,
    investors will _flood_ back into the market. Property
    sales will go up.

    Admittedly this is guesswork… but what else might explain this sudden creation of a special rental marketing team, at a time when realtors (we thought) were tightening their belts?!~

  • 38 Ned S // Jun 11, 2011 at 9:10 pm

    “at a time when realtors (we thought) were tightening their belts” – Read only a week or two ago the industry has gone from 50,000 agents down to 40,000 over the last year Oz wide Biker.

    Like I said, it sounds like things are different over your way.

    Can’t grizzle here though – The market ran hard for a lot of years. (Indeed my only grizzle is that I didn’t figure out what was happening and why and trust it a bit more for a bit longer – Though live and learn as they say! 🙂 )

    But after such a run, anyone who was never expecting a correction has got rocks in their head. I reckon we are down about 10%. Give it another 5 or 10% and I’ll probably dip my toe in the water re picking up one more – For cash. And keep the rest of my powder dry while I watch and wait and see again.

  • 39 Greg Atkinson // Jun 12, 2011 at 9:16 am

    Now getting back to the subject at hand, here are some interesting comments from Tim Coleback in The Age last year:

    “….it is an illusion to think that rising house prices increase our net wealth. For we buy in the same market that we sell in. Rising house prices mean we get more when we sell – but we pay more when we buy.”

    and

    ” in the 13 years to 2006-07, landlords as a group went from declaring net profits of $399 million to net losses of $6.4 billion. Those reporting profits grew by 36,000. Those reporting losses grew by 594,000.”

    – $6.4 billion…that’s a lot of money and I suspect it is even more now.

    Read more: http://www.theage.com.au/opinion/society-and-culture/housing-at-these-prices-will-leave-us-all-a-heavy-debt-to-bear-20100322-qr3q.html#ixzz1P13n5fFc

  • 40 Biker // Jun 12, 2011 at 10:02 am

    Wonder if Tim Coleback factored in the changes introduced by Costello (bless him!) which provide blokes my age with a raft of initiatives reducing our CGT obligation?

    Y’know, there are a number of transactions we could query regarding the value of any asset class. There are several aspects of sharetrading and currency transaction which have zero value to our economy.

    My kid in Canada picked up a very quick $10K last week, onselling a domain name. Gotta laugh!

    Property? I guess you could argue that our family will spare the Aussie economy between 10 – 30 years of pension payments. We’ll never receive any of the other benefits such as medical and pharmaceutical concessions either. Nor are our sons, in their mid-late twenties, likely to get a cent at retirement.

    Kind of evens the score for all the NG and CGT concessions we’ve enjoyed while working towards independence. 😀

  • 41 Ned S // Jun 12, 2011 at 7:57 pm

    “….it is an illusion to think that rising house prices increase our net wealth. For we buy in the same market that we sell in. Rising house prices mean we get more when we sell – but we pay more when we buy.”

    Same argument can be applied to the share market though can’t it Greg?

    Must admit all of this stuff just pretty well ‘bumfuzzles’ me nowadays when looked at from the big picture national wealth and even global wealth perspectives. (With nations presumably having to take into account how much of their ‘wealth’ is actually debt owed to other nations rather than debt that is owed internally within the nation?)

    Too hard for my head – It’s all the realm of those obviously very wise chaps called economists. (Should one ever feel like calling them a name that isn’t a four letter one! 😉 )

    While for the average mug who is interested in not going broke the rule remains “Buy low and sell high” and thus effectively obtain cash transfers from those who choose to “Buy high and sell low” doesn’t it? 😀

  • 42 Biker // Jun 12, 2011 at 9:30 pm

    And, of course, we’re supplying a vital service (accommodation), Ned. It’s one the government is unwilling, unable, or unprepared to adequately provide through public housing.

    The most frequent objections to property seem to include:

    * We’re LOSING money on it (the property investor is a fool);

    * We’re MAKING money on it (the property investor is greedy);

    * SHARES win out over property (property investors are fools);

    * Investors push prices up (the property investor is greedy);

    * The government supports property investors (govt is foolish);

    * The property market will crash (the investor is a fool);

    * Property investors deprive Oz (PIs are foolish greedy sods).

    I haven’t yet decided whether we’re fools or greedy bastards.
    Quote from the Comments section of a recently-completed Solar Electricity Survey a tenant just returned: “Reduced our bill from $160+ to <$40.00. BRILLIANT! THANKS. Still generating close to 1000W on hot days during Winter."

    I guess on the downside, I've ripped off the fed government which paid the grants for SES on six rentals. Jeez, I'm a drain on the Australian economy!~ 😉

  • 43 Biker // Jun 12, 2011 at 9:40 pm

    By the way, Ned, I know you’re a Gilani fan:

    http://moneymorning.com/2011/06/10/how-us-housing-market-can-save-us-economy/

    My view? He’s a genius… .

  • 44 Plornt // Jun 12, 2011 at 9:45 pm

    “Too hard for my head – It’s all the realm of those obviously very wise chaps called economists. (Should one ever feel like calling them a name that isn’t a four letter one! )

    While for the average mug who is interested in not going broke the rule remains “Buy low and sell high” and thus effectively obtain cash transfers from those who choose to “Buy high and sell low” doesn’t it?”

    Yes, Keep it simple, not simpler! Its amazing how over complicated people make things these days. There is just noway you could learn all these things, yet so many people try to. Find a system that suits your personality with an edge, and buy when people are fearful and sell when greed overwhelms the markets. Make sure you arn’t the patsy! If you don’t know who the patsy is, its probably you.

    The most important thing is you must invest with a statistically verifiable edge. No edge means you are gambling. Then apply the edge with risk management and thats basically it lol, not much effort or maintainence involved once the edges are found.

    I have 3 systems I use with edges. I might talk about all these other things, but its more me tangenting.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 45 Plornt // Jun 12, 2011 at 10:02 pm

    You want to become the casino in an investing sense. Essentially the whole investment universe now is one big casino with lots of people gambling instead of investing. Many not realising they are.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 46 Biker // Jun 13, 2011 at 6:41 pm

    Y’know, we say “Buy low and sell high” but do most people really act on this old adage? I doubt it.

    Our herd instinct suppresses this wisdom. We do what the crowd is doing. We go where the herd is going. We wait for the herd
    before we move.

    Right now, the herd is bleating “It will go lower, much lower…”

    That instinct which has, to a great extent, ensured our self-preservation, drowns out the little voice whispering
    “Buy low and sell high.”

    Happily, there’s an Old Age Pension waiting for the herd.
    There _is_ safety in numbers. 😉

  • 47 Ned S // Jun 14, 2011 at 9:03 pm

    Keep watching your dibs I reckon Plornt – A pretty smart call would seem to be that if the Dow DOESN’T break below 11,600 by August or September (with the punt being that it won’t) then look for it to be around the 12,800 or 13,600 mark come November/December? – Me … As an old bloke who doesn’t want to stress his heart! – I’m just sticking to be being about 50/50 Oz housing and cash … 🙂

  • 48 Plornt // Jun 14, 2011 at 10:42 pm

    “Keep watching your dibs I reckon Plornt – A pretty smart call would seem to be that if the Dow DOESN’T break below 11,600 by August or September (with the punt being that it won’t) then look for it to be around the 12,800 or 13,600 mark come November/December? – Me … As an old bloke who doesn’t want to stress his heart! – I’m just sticking to be being about 50/50 Oz housing and cash”

    Yeah thats the period to watch out for. Or we could capitulate now to 11,600-11,800. I’m thinking flash down to that area.
    August and September can be good months, usually October, November are terrible historically.

    I’m thinking 3 month rally then Oct – Dec a complete collapse to below 11,000. But can change as things change.

    Its clear this is a topping process, so you’ve got to base your investments on a range. Probably a 11,000 – 13,000 range for 3 years here.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 49 Plornt // Jun 15, 2011 at 11:52 am

    Looks like we are at or near a bottom on XAO for Long term holdings, not sure about DJIA.
    XAO rally to Mid September, then new lows of 4,200.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 50 Biker // Jun 15, 2011 at 1:16 pm

    Now getting back to the subject at hand, here are some interesting comments from Michelle Hele reported in PerthNow:

    http://www.perthnow.com.au/business/generation-y-most-likely-to-make-sacrifices-to-buy-their-own-home/comments-e6frg2ru-1226071532730

    😉

  • 51 demografix // Dec 5, 2011 at 11:53 am

    Why would an advanced society want the cost of living, including house prices, to be dearer for the following generations?

    1. CGT on the PPOR at 20% if sold under 10 years. (exemptions for legit reason to move. ie work family health etc)
    2. Land tax of 0.5%, all property, no exemptions (pensioners and other low income groups can accrue this until the house is sold)
    3. Death tax of 20% on estates over $1million. – Yer great, work all your life to leave your kids a future to get taxed, on stuff youve already purchased with dollars than have been taxed.
    4. No stamps. this should have happened with gst.
    5. Family Assist Part S (Senior) – A pensioner can sell up and the proceeds remain asset test free for the pension, if they move into another shared home. The family/young couple (need not be related) would get the rent tax free aand a $5k grant from the govt. We can not end up with 32% of our homes as lone occupants. That is a disaster We are currently at 22%.. this is dumb.
    6. NG on new builds only. dumb.
    7. GST to 20% and the tax free threshold for wage earners raised to $40k. Increase welfare payments accordingly. doesnt bother me i suppose, but major tax reform would be nice.
    8. Rent increases no greater than CPI +2% by law. Natural disasters aand mining booms are creating hugh rental stress. dumb.
    9. Marriage tax rebate. For marriages over 10 years a 3% reduction/rebate in PAYG tax. lol, dumb. you should be able to income split though.
    10. For someone who emigrated away from OZ and has been away longer than 5 years, their HECS debt get cancelled on their permanent return.

  • 52 Biker // Dec 5, 2011 at 12:05 pm

    Quite a wishlist, Demografix!~

    The link I’d suggest is here:

    http://www.northpole.com/mailroom/

  • 53 demografix // Dec 5, 2011 at 12:22 pm

    Biker
    The backrooms are discussing rent caps now and from what I hear around the halls, many other anti-speculation acts may come into play….
    the UK are about to introduce their marriage rebates.

    Sorry, I did not remove the comments in my original post. The last bits at the end of each point are not mine. dumb etc…

    Lobby on…

  • 54 demografix // Dec 5, 2011 at 12:23 pm

    PS. I have done really well so far on my SGP PUTS….

  • 55 demografix // Dec 5, 2011 at 1:03 pm

    1. CGT on the PPOR at 20% if sold under 10 years. (exemptions for legit reason to move. ie work family health etc)
    2. Land tax of 0.5%, all property, no exemptions (pensioners and other low income groups can accrue this until the house is sold)
    3. Death tax of 20% on estates over $1million and amounts over $1m.
    4. No stamps.
    5. Family Assist Part S (Senior) – A pensioner can sell up and the proceeds remain asset test free for the pension, if they move into another shared home. The family/young couple (need not be related) would get the rent tax free aand a $5k grant from the govt. We can not end up with 32% of our homes as lone occupants. That is a disaster We are currently at 22%.
    6. NG on new builds only.
    7. GST to 20% and the tax free threshold for wage earners raised to $40k. Increase welfare payments accordingly.
    8. Rent increases no greater than CPI +2% by law. Natural disasters and mining booms are creating huge rental stress.
    9. Marriage tax rebate. For marriages over 10 years a 3% reduction/rebate in PAYG tax.
    10. For someone who emigrated away from OZ and has been away longer than 5 years, their HECS debt get canceled on their permanent return.

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