Great article, I didn't realise the effect vacant land has on urban planning. Land tax seems a very blunt tool to achieve better planning outcomes.

It's great to see another article which focuses on the unproductive economic activity of land speculation for which the rest of us pay.

More has been written on this on other threads, See:

* forum in response to Peter Saunders' "They're not really that poor" at http://forum.onlineopinion.com.au/thread.asp?article=6576#98116

* forum in response to Peter Saunders' "Defining Poverty" at: http://forum.onlineopinion.com.au/thread.asp?article=3737#12173

* forum in response to Andrew Bartletts' "A crisis in housing affordability" at http://forum.onlineopinion.com.au/thread.asp?article=4834#53462

* forum in response to James Sinnamon's (i.e. myself) "Living standards and our material prosperity" at http://forum.onlineopinion.com.au/thread.asp?article=6326#93845

Some questions I have:

I'm, not quite sure why it is in the interests of property speculators to hold on to 399 vacant allotments in Bluestone Ward. Perhaps someone's worked through the figures and calculated that they will still be ahead. If so, the appreciation in property value would have to be scary to offset the rental income foregone as well as rates and land taxes paid in the meantime.

Another point: even if 1,058 extra people could be accommodated in an extra ward, what would that the crowding do to the quality of life? How would the existing infrastructure to supply water, electricity, transport services, etc, cope?

I say this because I don't see any easy solution to the housing affordability crisis whilst the population increases at the current rate. This is in fact welcomed and anticipated by property speculators, in order to increase the value of their socially unproductive investments.

Whilst I dont deny that speculation has an impact on housing availability and affordability, the author has let at least one furphy slip into the article...
"An example is 62-64 Geelong Rd, Footscray. The property was bought for $510,000 in 2000. Just seven years later it was sold for $970,000. What did they do? Nothing - the property was left vacant. Are such paper shuffling profits justified? Should they be supported with low capital gains and negative gearing? Should they pay less tax than the lowest wage earners?"
The prima facie taxable gain on this is $230,000 (50% discount for holding for more than 12 months), with tax at a marginal rate of 46.5% - that's hardly lower than the lowest wage-earner. Even assuming it was jointly held, the tax rate would still be 40.5%. AND there is no negative-gearing allowed if the property is not available for rent. If its been deliberately withheld from the market, interest is not deductible (it will come into the CGT calculation, but its effect as a deduction is then effectively halved).

Added to that it is not paper-shuffling profits. The investors take a serious risk that the market will fall (as it has in Sydney for example), and they could end up in a loss situation. They also tie-up their capital for several years, that could be earning money else-where.

Land tax is paid at the same rate on vacant land as it is on income-earning land (its LAND tax, not development tax).

When I first heard about the negative gearing scheme
And very little capital gains tax.
For housing investment I was shocked.

This is the most blatant tax hand out to the Rich
I have ever seen.
This combined with the work choice laws.
Reducing the wages of low skilled workers

Why is Australia allowing foreign investors purchase houses?
As they can obtain finance at far lower rate than an Australian can.

I can see why Howard was voted out.

northerner, read my response on capital gains tax and land tax (as well as the reference to negative gearing). The benefits are NOT as great as many would have you believe, and are no different to taxation on any other income-earning activity (that is, you can claim any deductions relating directly to the earning of your income). Capital gains tax on investment properties are no different to any other asset. There is no special treatment.

Further more, if you discriminate in what deductions you allow a housing investor compared to other investment types, you will see droves of investors leave the market. More importantly, there will be much less new development, leading to continual tightening of the market. On top of that the investors that remain in the market will need to increase rents in order to compensate for the denial of tax deductibility of expenses.

Negative gearing is a risk taken that whilst rents are lower than expenses (yes, this means that bank payments must be met out of the pockets of investors), capital appreciation will make up for the forgone income in the medium to longer-term. It is a RISK, and one that sends some property investors to the wall. The vast majority of property investors are normal mums and dads (middle-class) that own 1-2 properties, not big tycoons that never pay any tax.

I am about to run out of word limit and posting ability, but once I can get back on, am happy to answer any questions about the true nature of tax on property investors.

It has been long recognised by all senior economists that deriving public income from site value is a sensible nethod. It makes no sense to punish/tax people for producing goods and services, whether by labour or capital investment, whilst rewarding those who derive their income from land-rent (cf., http://www.taxreform.com.au).

For country gal, there really on four ways that land speculators can lose money:

a) Population declines thus reducing demand for land.
b) The government releases land that has been withheld, thus increasing supply of land.
c) There is a general economic downturn or
d) There is a collapse in the land-market due to speculative overinvestment.

I suspect in Sydney's case option (d) contributed significantly.

As a country gal, I would have suppose that you would have supported a site rental scheme; historically that's where it's been most popular. It gives growth to country towns!

Regards,

Lev

Karl,

you obviously dont know what you're on about.

You are a true believer, as your opening paragraph clearly displays, with your basic foundation being the absurd illusory, abstract notion of a 'right.' Then attaching that sillyness, to housiing.

You dont understand the difference between speculation and investment. If a person holds multiple income producing assets with a view to long term income production and capital growth, that is investment, not speculation. Which is happening when someone goes out on a limb and accumulate multiple rental properties. As oppossed to merely buying, possibly value adding, not producing income and selling an asset for a profit, which is speculation. If thats your concern, you should be pouring your scorn on the schlock mug-cart.

You have no idea the difference between price and value. Nor what drives prices, versus value. The primary driver of price is credit creation and credit availability, both of which have been rampant in the last 10yrs. A device of government in collusion with banking to keep the house of cards going. Raising taxes is just more of the same ponzi scheme. One thing you did get right is that the price doubling of a bit of land in footscray is nothing but a paper shuffle, or more correctly, the paper shuffle of fiat currency credit based ponzi schemes.

In the meantime, there has been no rise in the standard of living or productive capacity of what that deflated fiat money purchases. l think its called inflation. Yet the 'gain' resulting from credit creation is taxed. Which is a very sneaky way of transferring wealth of the people into the gubberments tax coffers. Which would, no doubt, please the likes of you.

Thankfully, for the average home owner, the 'gain' on their house is tax exempt. Small mercy.

So let me see, if in 2000 I'd bought BHP shares instead of land
that only costs, my 8$ investment would be worth 40$ today. Plus
they would have paid me a dividend twice a year, with no land tax
etc. Australia benefits, my dividends are paid here, not to overseas
investors, so our current account benefits.

So my 500k$ would be worth 2.5 million$ and I would be benefitting
from the resources boom. Why on earth would I want to invest
in land that only costs land tax etc?

Anyone can buy a few shares, not just "greedy speculators". But
I know, some prefer to play the pockies etc, or buy the latest plasma
tv, or whatever. Some people can't help themselves. They refuse
to invest in Australia's and their own future, by saving a few
pennies for a rainy day.

If the Govt wants cheaper housing, then don't limit land supply, its
that simple.

Both Howard and Rudd just do not get it.
It is as plain as the nose on our face.
Genuine potential home Owners who want housing or land will be beaten in the rush by speculators. This article proves this point.
The interest rates are still low that doesnot matter to speculators they have property that funds further investments. True Genuine Home Owners are tramled in the rush and are beaten time and time again by those with capital and ready cash supply and demand. Governments have to abolish subsidising the wealthy and provide assistance to those with genuine mortgages on their only home. Subsidise 25% of the interest on the mortgage and reap the negative gearing from the speculators to pay for it.

"Subsidise 25% of the interest on the mortgage and reap the negative gearing from the speculators to pay for it."

Why a subsidy? Perhaps interest on home loans could be made
tax deductable, as long as home owners pay capital gains tax
on their windfall profits, when they sell their houses, rather
the the huge tax free profits made now. We have to pay tax
on all other investment profits, why not on our homes?

Trade215,

The notion of rights is more complex than you give credit to. As a normative standard it is quite plausible to argue for a "right to housing" in an advanced modern society.

I would also beg to differ on the distinction you make between between speculation and investment. An investment in the input of capital in a manner that provides additional goods and services (in addition to a tidy profit to the investor). Speculation consists of appropriating natural resources and withholding them from market-trades; profit is derived through a monopolistic approach, and provides neither additional goods or services in the process. An example which may assist you in this process is to distinguish between the investment of housing, and the speculation of land.

Yabby,

You are quite correct, one of the means to provide cheaper housing is for the government to open up the land supply. However this obviously is limited in both an absolute and relative sense. The application of site rental to the public purse ensures that those who hold land make the most efficient use of it.

Regards,

Lev

Yabby, any gains you might make from selling your own home is hardly "investment profit". It is almost invariably eaten up by the next house you purchase.
And FWIW I agree capital gains taxes are too high, certainly for investments held longer than 5 years. They are certainly part of the reason I've never bothered investing much in the stock market.

Speculators schmeculators. Yes, it is good to see this scrawny scapegoat dragged out of the cage again. And how about all those women getting paid jobs and putting all that extra money into the market? Now hasn't that totally stuffed things up?

Young Karl might like to consider the effect of relaxing the development restrictions on residential landowners. Then all of those schmeculators might suddenly find themselves with more competition. For example, he might ponder how it is that some landowners find themselves able to subdivide, but are deterred by the substantial conditions imposed, while close by a rabbit warren of shoddy shoeboxes is stapled together, and the development is unrestricted. Karl might also consider that the profits derived from the property market are more than offset by the cost of providing infrastructure to cope with the increasing population. Thus it is a driver of inequality in Australia as the cost and profits are not equally distributed (Karl at least has a partial understanding of this point). And, of course, without governments pursuing a policy of mass immigration, there would be no housing affordability crisis.

The tax concessions given to property investors is responsible for a great deal of housing (as are women in paid employment). At least Karl might try to understand the factors controlling the market better before villifying these people.

A land tax will not work.

A land tax can only work where it meets economies of scale. That means it can only work in the major coastal cities of Australia and nowhere else.

It deprives those that manage to pay off their mortgage or first home buyers, etc of having the security of an actual home unless it becomes a business, ie. becomes productive.

It deprives those in country-coastal towns and even more of those that live inland.

The reason there is so many speculators on land and housing, primarily in housing is because it is the only way to make any significant money. You can do it about every 10 years as Real Estate’s about the only product that you can buy that appreciates. Arguably the stock market’s another way but that takes at least 20 years and you have to avoid watching your stocks every minute and hope someone doesn't buy out the companies your stocks are in so you end up with nothing.

When I see TV shows like Hot Property the fools that buy a house for $700 000 and over a million dollars… Generally because the house they are buying is only worth it dueto the foolish idea of location, location, location, ie. usually beachfront. Even more so when the house depending on the size would only cost around $200-300 000 to build. Its silly.

I don't own property but I know there’s no way in hell that you can ever possibly save enough to buy a home outright and live within reason on the average wage. Sure you can get a mortgage but then that's another 30+years to pay off. And in today's economic climate where job insecurity is paramount and rising interest rates. Foolish notion.

The only solution is to do what is suggested in the article, get multiple-properties, pay off the principal-of-interest on the loans and every 5-10 years sell the house. You may also need housing upkeep and make a loss, as it is money out of your pocket, hence negative gearing. It is the only way to get ahead.

"However this obviously is limited in both an absolute and relative sense."

Lev, Australia is one of the least populated countries on earth,
yet people can't build houses as land is too expensive? Clearly
those Govt planners have screwed up badly, it makes no sense
at all.

Nic, a house is the largest investment that most people will ever
make and of course its an investment. Any work you do on it yourself,
will increase its value and you can cash that in tax free. Go
to work and you pay full tax on your wages. Given the tax free
nature of houses, no wonder people speculate with them.

You are free to buy a run down old dump, do it up as you live in
it and cash in all the way. You are free to buy a house in a slum
closer to the city and as the area is rebuilt due to high income
yuppies wanting to live close to city centres, cash in, all tax
free.

Lastly you have contradicted yourself. On another thread I kind
of recall you telling me that you don't mind paying your last cent
of tax, as its so well spent by Govts, or words to that effect.
Now you tell me you won't invest in shares, due to the tax.
You should be thrilled to pay more tax, given that you think that
it is so well spent :)

Whether or not it was with the help of negative gearing, when it's repeated across the country, you can see what it's doing to house prices. Also, I had a gut feeling that simply subdividing more and more land on the fringes as some groups want wouldn't much help housing getting more affordable. Gee! If your study is just for one ward of a council, you've got to wonder how much vacant land is sitting around Melbourne unused!

Posted by Country Gal, Friday, 30 November 2007 10:02:45 AM

Whilst I dont deny that speculation has an impact on housing availability and affordability, the author has let at least one furphy slip into the article...
"An example is 62-64 Geelong Rd, Footscray. The property was bought for $510,000 in 2000. Just seven years later it was sold for $970,000. What did they do? Nothing - the property was left vacant. Are such paper shuffling profits justified? Should they be supported with low capital gains and negative gearing? Should they pay less tax than the lowest wage earners?"
The prima facie taxable gain on this is $230,000 (50% discount for holding for more than 12 months), with tax at a marginal rate of 46.5% - that's hardly lower than the lowest wage-earner. Even assuming it was jointly held, the tax rate would still be 40.5%. AND there is no negative-gearing allowed if the property is not available for rent. If its been deliberately withheld from the market, interest is not deductible (it will come into the CGT calculation, but its effect as a deduction is then effectively halved).

Added to that it is not paper-shuffling profits. The investors take a serious risk that the market will fall (as it has in Sydney for example), and they could end up in a loss situation. They also tie-up their capital for several years, that could be earning money else-where.

Land tax is paid at the same rate on vacant land as it is on income-earning land (its LAND tax, not development tax).

Posted by Country Gal, Friday, 30 November 2007 10:02:45 AM

Question
What is the exact number of dollars tax paid on your above comments?
and is it more or less or eaqual than someone actually working for living?

"Given the tax free nature of houses, no wonder people speculate with them"

Exactly - the tax structure encourages speculative investment into houses at the expense of other forms of investment that would almost certainly be better for the economy in the long run, and certainly for the sake of housing affordability.

Buying a dump and doing it up *is* genuinely adding value to a property, and damn hard work, and you deserve every cent of the profits. But the vast majority of profits that speculators make out of the housing market involve minimal, if any value-adding.

Just because I believe one form of tax is too high doesn't mean I think that the total amount we pay in tax is too high.
I'm not qualified enough to make a serious assessment of the various ways in which taxation could be better structured, although one option would be to significantly cut capital gains tax, while adding a carbon tax, in such a way that the outcome was more or less tax-income neutral (not my idea by the way, it is one Al Gore has promoted though).

I assume you weren't being entirely serious to suggest I should be thrilled to pay more tax - but the reality is that I would be happy to if I knew it would help ease some of the social burdens our country is facing. This is purely selfish motive - I don't want to be living in a country with huge income and opportunity disparities, with an entrenched "working poor", or indeed where many of my family and friends are disadvantaged by a system that often doesn't work in their favour. In other words, I value the freedom of living in a reasonably egalitarian, cohesive society far more than the freedom of being able to choose exactly how to spend every cent I earn. I'd also like to think most people would agree with this if you put them on the spot about it. Traditional "libertarians" wouldn't of course, but I personally think most of them have a very narrow, short-sighted notion of liberty.

"daggett" wonders how speculation on VACANT land can be attractive, saying "the appreciation in property value would have to be scary to offset the rental income foregone..." Suppose that for the same amount of money, you can buy either ONE house-land package, in which the house depreciates and incurs management costs while the land appreciates, or TWO vacant lots, both of which appreciate. A higher land tax tilts the balance in favour of the former option, in which the tax is payable on one lot instead of two.

"daggett" also mentions crowding and infrastructure requirements. But isn't it better to have 1000 extra people living in your suburb than 1000 extra people driving through it? And isn't it better to have houses than fenced-off "bomb sites"? And isn't it cheaper to terminate the infrastructure network closer in than further out?

Country Gal wrote: "AND there is no negative-gearing allowed if the property is not available for rent. If its been deliberately withheld from the market, interest is not deductible (it will come into the CGT calculation, but its effect as a deduction is then effectively halved)." In other words, interest on the price of a vacant lot is deductible against the capital gain. But what if the interest exceeds the capital gain? Is it then deductible against something else?

In any case, investors who want negative gearing don't have to add to the supply of housing; they can, and usually do, buy an existing house. Only if negative gearing were confined to NEW CONSTRUCTION could it be defended as an incentive to supply housing. Such a reform, far from seeing "droves of investors leave the market", would stimulate construction, loosen up supply, and make rents and prices more affordable.

And if you dogmatically insist that there should be no discrimination between property and shares in relation to negative gearing, note that new construction in the property market is analogous to new floats in the share market. So negative gearing can be appropriately restricted in both markets.

Nic, the most speculation going on, is still with peoples own homes. IMHO
houses should be treated like any other investment, if we live in them or not.
That’s what happens in Europe.

Lots of “little people” are in fact benefiting from the housing boom.
My new neighbour, was offered a huge amount for his Perth property.
He took it, bought 100 acres, built a house and is still left with half a million
in the bank, all tax free. I’m happy too, he’s a great neighbour :)

A lot of people buying a string of properties, have in fact come unstuck.
Interest rates have risen, some housing values have dropped, those
you beut seminars did not deliver what they promised and a lot of people
got burnt. Some made a quid, but many have also lost.

Kevin 07 might yet deliver on your notion of a more egalitarian society.
I was impressed by an article in the Weekend Australian, where he visited
a few homeless shelters, before the elections. He is thankfully not pushing
for a welfare state, but a state where people are empowered to help themselves.
I go along with that completely and wish him well. I think that Kevin has the
brains, but have some doubts about the labour movement as a whole. Hopefully
he will dominate, if those are his policies.

As to the future, it might pay to read the latest edition of the Economist.
The US $ used to be the global reserve currency. The latest scandals have turned it
into a sub prime currency. The world is changing, Americans seemingly just
aren’t aware of it yet, apart from a few smart ones like Gates, Buffett etc.

"trade215" complains that taxation of increases in land values is a "sneaky way of transferring wealth of the people into the gubberments tax coffers." But the major mode by which gubberments increase land values is expenditure on infrastructure -- and the tax on the said increase is LESS than the said expenditure, which is why infrastructure is run down. Hence higher taxes on increases in land values -- even if initially offset by lower taxes on other things -- are the solution to the infrastructure problem.

Yabby wrote: "If the Govt wants cheaper housing, then don't limit land supply..." Yep, and the report shows that the chief limitation on land supply is speculative hoarding. Solution: Tax the hoarders out of business.

"vee" complains that land tax takes away the security of those who have paid off their homes. I answer: Only if it applies to owner-occupied residential land, and only if the owner-occupants can't pay it. The latter condition holds for any other tax and, for that matter, any other debt. In general, if you can't pay your debts, you go bankrupt and lose your house. But this is LESS likely to happen with land tax, because the tax is commonly allowed to be deferred until the property is next transferred.

"vee" also seems to think land tax discriminates against country and inland areas. Not so. Because the highest land values are in coastal cities, greater reliance on land value taxation would AUTOMATICALLY give much needed tax relief to struggling rural towns (without technically violating any constitutional strictures against discriminating between locations in matters of taxation).

Concerning Fester's remark about the two-income household: Any savings or additional earnings tend to be competed away in the land market. As soon as an earning measure (e.g. a second income) or a saving measure (e.g. no kids) becomes socially acceptable, it is on the way to becoming compulsory, because it gets built into land values. This problem cannot be alleviated except by reducing the intensity of competition for land -- e.g. by taxing the speculators out of business.

Yabby, I don't see how you can call it "speculation" when you're talking about your own home. But whatever, that's not what I'm talking about. It's those with a bit of spare cash deciding that a good place to put their money is into buying up existing properties, making no improvements to them, and renting them out.
They get all the benefits of negative gearing, are adding nothing to the supply, and are driving up prices over and above what young families trying to get into the market for the first time can afford.
grputland's suggestion of allowing negative gearing only on new construction makes a lot of sense to me, as long as that also applies to things like warehouse-conversions, and adding new rooms to existing stock.
Yes, of course there are risks even with non-value-adding property investment, and people have been burnt, but the risk-return ratio is still far more attractive than, say, investing in the stockmarket, which at least has the benefit of providing capital to enterprises that are then in a position to use it to boost their productivity, thus being able to boost the salaries they are able to pay to young workers - who are the ones needing money to buy homes!

Yabby,

You are quite right with regards to supplied land. I am not disputing that. The reports of the Housing Industry Association clearly show that land price over the past thirty years has far exceeded increases in housing prices. However, it is worth keeping in mind that not all land has the same value. Inner urban land is more expensive than the vast expanses of desert, primarily because of surrounding infrastructure. Without site rental/land tax it encourages land speculators to engage in meagre development and accumulate income without significant contributions to production. The number of single-story and two-story buildings (and even vacant lots!) in the Melbourne CBD is stark proof of the failure to promote efficient use of land.

Bottom line is we to open up the land supply AND increase land tax in lieu of taxes on housing. More buildings, less land speculation.

Vee,

Your assertions were well answered by grputland (a rather appropriate username in this thread). Read them carefully.

“but the risk-return ratio is still far more attractive than, say, investing in the
stockmarket”

Nic, the evidence suggests that you are wrong, but I grant you, many don’t understand the stockmarket
or how to approach it. Its easier to buy another house
which can actually be seen. OTOH yes,
we have a lot of baby boomers, who have been advised to provide for their own
retirement, as Govts will no longer do it for them, who buy another house or two.
Why should that be such a bad thing?

I cannot comment on the Victorian situation as I am less in touch with the rules
and regulations there. But certainly in WA, anyone with a block of land which
is not being used and has increased in value, will be paying a lot of land tax.

Its become a political issue, as lets say mum and dad bought a beach shack on
the coast, years ago. Due to the increase in land values and thus land tax,
they can no longer afford to keep the place for their weekends and are forced to
sell by high land tax charges. These are little people being hurt, not speculators.

The largest holders of large chucks of suburban land, are still State and Federal
Governments. Land held for the military, land held for other Govt depts and of
course large chunks of land held by the churches, often left to them in legacies.
They pay no taxes and charges, AFAIK, so can sit on land for as long as they want.

So the land issue needs to be approached from many sides, not just blame it all
on the so called evil speculators.

Mind you, given what is going on with the global money supply, I’d say that
the crunch might yet come here a little down the track and when real estate
values start to drop, due to more difficult to obtain and more expensive credit,
as usual there will be lots of tears. The wise, who did not overborrow or overpay,
will be the winners

BTW Nic, if you didn't hear the report on last night's PM
programme, here is the transcript, which kind of sounds rather
serious to me.

http://www.abc.net.au/pm/content/2007/s2108461.htm

The latest US banking twist is bringing out discussion of
Enron style of happenings within the system and talk of some
of the largest banks going bust. So I'd say the whole thing
is a long way from over and given that many of our banks
borrow from overseas to lend locally, its bound to have
an effect on local lending and house prices.

One financial report that I read last night, claimed that
median house prices in California had dropped by 90k$ since
August. I have yet to see that verified elsewhere, but it
looks like 2008 could be a rather interesting year, lower
house prices might well be on the cards.

In case anyone missed it 'grputland' hit the nail on the head with this quote:

“Only if negative gearing were confined to NEW CONSTRUCTION it could be defended as an incentive to supply housing. Such a reform, far from seeing "droves of investors leave the market", would stimulate construction, loosen up supply, and make rents and prices more affordable."

Yes indeed.

As construction has been the missing element in the “housing” boom the incentives for speculators to drive-up the price of established homes are a clear & obvious travesty - yet few in the major political parties or media are keen to openly discuss it.

On one hand the tax rorts have exacerbated the generational wealth divide as first-home buyers now find themselves paying up to 8 times average yearly income for properties that cost 4 times annual income not that long ago. Thus delivering huge windfall gains on investments that add nothing to production.

The wealth and "prosperity" generated by the speculative boom in house prices represent a redistribution of wealth from 1st & future homebuyers to (mostly older) property owners rather than a net increase in wealth.

The established owner-occupier's only real advantage has been an increased capacity to borrow.

The implications of this go beyond housing affordability & generational disadvantage. A recent speech by Deputy Reserve Bank Governor Ric Battelino* pointed out that household debt has gone from being equivalent to 30% of GDP in 1990 to ‘around 100%’ (yes 100%) of GDP currently & nearly all of it is attributable to borrowing for “houses to live in” & “houses to rent”.

This in turn adds dead weight to foreign debt as Australian lenders sourced a lot of their funds from overseas. Interestingly, business debt by comparison is equivalent to 60% of GDP.

The relative size of the household debt has dire implications for the entire economy given the continued rise in interest rates and & the potential for a fall in property prices.

-Mr Smith

**See: ‘Some observations on Financial Trends’ under “Speeches” on the RBA website

Yabby, there's a certainly a good possibility of an easing of house prices if the credit crunch worsens and its effects spread to Australia, however there's a number of critical differences in the U.S. market and the one here. For a start, the U.S. housing market is oversupplied: in the last 5 years, they basically built too many houses for too few buyers, whereas here vacancy rates are at record lows. Secondly is the level of subprime lending: around 20% in the U.S. vs 1-2% here (where they are called "non-conforming" loans).
And thirdly, the lowest interest rates ever got here was around 5%, vs 1% in the U.S.
On that basis, I would be extremely surprised to see Australia witness anything like the collapse in housing prices that the U.S. has seen.

Nic, houses are much cheaper in the US, as land is less regulated,
therefore cheaper. More people would build houses here, if more
cheaper land was available and its not, due to Govt regulation.

Its pointless to say build more houses, if the cost of the land
and house package is above what people can afford to pay.

As to the US problem, subprime is only part of that story. What has
gone is trust in the banking system. Banks don't even trust each
other, as nobody knows how close to going broke anyone is. The
truth is yet to be revealed. As alot of our loans come out of the
US banking system, we are sure to feel the effects. Already banks
here can be seen to be actively chasing retail deposits from retail
investors, as their cost of borrowing from overseas wholesale has
increased. That will be passed on to borrowers of course.

Money in Australia, has been too cheap and too easily available.
I feel that is about to change. When they start to talk of
America's largest bank going bust, you'd be kidding yourself
that it would not have quite serious consequences here too, as
its all one global economy now. Anyhow, a slowdown in our economy
might be a good thing, bring some normality back into the money
and employment markets, as both have been way overheated.

"More people would build houses here, if more
cheaper land was available and its not, due to Govt regulation"

We've been over this before: there is plenty of cheap land available , but it's cheap because it's in locations where people generally don't want to live (a brief search on domain.com.au found several good-sized blocks of land under $120000 around 30km from the city). OTOH, I do agree that government regulation restricting residental developments in existing areas is a problem.

But speaking of government regulation, it's almost certainly the case that the banking system woes in the U.S. are the inevitable outcome of inadequate government regulation. Indeed, the almost certain outcome is going to be re-introduction of stricter regulation, but unfortunately done as a "last resort" measure, not as a genuine acceptance that a sensible regulatory framework is necessary for financial markets to operate smoothly.

A few points to address:

Grputland:
If the undeductible interests costs on holding vacant land exceed the capital gain (so that there is a capital loss), it can only be offset against a future capital gain. Capital losses are not deductible against normal income - they can however generally be carried forward indefinately to be offset against future capital gain.

Also, the negative gearing I dont believe is defensible on the basis of its potential to increase housing supply. I think it is defensible on the basis of normal profit calculations - that is, you get to deduct your expenses against the income that you earn. Its not a tax concession, its the basis of our entire income tax system. I cant for the life of me see why there should be different rules for people that earn income from investments compared to business owners or even wage earners (yes wage earners ALSO get to deduct any costs associated with earning their income). Its not this evil concession that only the rich get, as is sometimes portrayed. The investor still has to fork the excess payments out of their own pocket - they are making a loss.

Northerner, tax at the marginal rate outlined above on taxable capital gain of $230,000 is around $86,550. This is exactly the same as a wage earner would pay if they had earned this amount of money. Capital gains once calculated is added to normal income, so is taxed in EXACTLY the same manner.

Something else to consider is that "speculators" that buy and hold vacant land do NOT pay capital gains tax.They pay tax on the full profit.What's the difference?A capital gain is subject to a 50% discount before being taxed (as long as asset is held for more than 12 months)-this was a simplification to the indexation rules that we had,designed to cut down on compliance costs.Where the investment is speculative (less than 12 months),or designed to be resold at a profit (vacant land),any profits are taxed as normal business profits.If the example above is for vacant land,the tax impact is actually 46.5% marginal rate on a profit of $460,000,and tax roughly is $193,500 (big difference).

Yabby,I agree with you about individuals speculating on the price of their own homes.Your own home IS an investment in that it increases in value in line with other housing, and potentially more if you make improvements to it.Currently this is tax-free,but encourages a lot of people to buy and live in "dumps" and do up themselves to make a tax-free profit.If it is your intention to make a profit,then the gain will be taxable anyway,but who is going to admit that!The argument that this should be treated differently because any gain is eaten up in your next purchase is fallacious.This same logic can be applied to almost any investment.Eg,I sell shares that have made a gain,with a view to purchasing different shares-I could make exactly the same argument. But in this case I need to set aside some of the proceeds of the sale in order to pay tax,so I cant buy as big a parcel of new shares as I would like. n the same fashion with owner-occupied housing,I would have to set aside some proceeds to pay tax,and I couldnt upgrade quite as much as I would have been able to otherwise.We have to put aside money for stamp duty on the new place-paying income tax is no different.Its just that as a nation we see housing as different to other investments,more of a right,so we extend preferential tax treatment to owner-occupied housing.

Country Gal, do you make some good points. However, ultimately, the goal is to encourage investors to prefer investments that add to the housing stock, or that contribute towards productivity growth by providing capital to businesses. If the best way to achieve that may not appear to be fair or even consistent on the face of it, but if it leaves everyone better off in the long run, or at least *avoids* significantly disadvantaging young families trying to get into the housing market for the first time, then this needs to take priority over simplistic ideals of what's fair and/or consistent.

But regarding the difference between profits from occupied homes and profits from shares: yes, there is a difference! Every time you sell a home you have to find somewhere else to live. Every time you sell off part of an investment portfolio, you don't have to reinvest it - indeed, there are some people that simply bank the whole amount and retire living off the interest and occasional withdrawals.
Of course, if mortage payments were tax-deductible, the situation would be different - indeed, that's how it is in the U.S. Given this obviously works there, there's no reason it couldn't work here. What I don't know is whether capital gains tax in the U.S. varies between housing and, say, shares. Personally, I'd be happy to see capital gains tax scrapped entirely, and look at new ideas like carbon taxes, windfall taxes and speculation taxes such as the Tobin tax.

If I understand Country Gal correctly, the interest cost incurred while holding VACANT land is treated as a capital loss and as such is deductible against ANY future capital gain -- not necessarily that on the said land. So negative gearing deductibility still applies, except that the gains and losses are discounted 50%.

She then asserts: "yes wage earners ALSO get to deduct any costs associated with earning their income."

Oh no they don't. The three biggest expenses related to earning wages are:

(1) The additional cost of accommodation within commuting distance of a job (as opposed to a remote location) -- NOT deductible, although the full cost of BUSINESS accommodation is deductible.

(2) Transport to and from one's place of work -- NOT deductible, although transport costs incurred by corporations are deductible.

(3) Childcare -- not rebateable until recently; and still the cost in excess of the rebate is NOT deductible.

So the system really DOES discriminate against wage earners. That incidental expenses are deductible against taxable income is not the principle on which the income tax system is built, but the BIG LIE on which the POLITICS of the system is built. And Country Gal has fallen for it.

Moreover, the 50% discounting of capital gains manifestly treats capital gains more generously than earned income. If depreciation is not discounted before being deducted from taxable income, neither should capital gains be discounted before being ADDED to taxable income.

And I repeat: Even if the tax system were consistent, which it isn't, that would NOT be a valid argument against confining negative gearing of property to new construction, because analogous things can be done in other asset markets -- e.g. confining negative gearing of shares to new floats.

By claiming that "speculators" don't get the discount on capital gains, Country Gal falls for another Big Lie: that the difference between investment and speculation depends on the time for which the asset is held. In fact it depends on the nature of the asset -- in particular, whether acquisition of the asset constitutes or induces additional creation of wealth, as is the case with (say) plant and machinery, but not with land (because they ain't makin' any more land).

When the asset in question in vacant land, the 12-month threshold for discounting of capital gains merely distinguishes between two classes of speculators: those who don't mind if their unearned gains are small as long as they are quick, and those who don't mind if their unearned gains are slow as long as they are big. Of course the reason why the latter can afford to wait is that they are better off in the first place. Yet the system discriminates in favour of the latter! Thus we see that the homage paid to "Mum and Dad investors" by defenders of the status quo is yet another Big Lie.

grputland is right again on the distinction between speculation and investment.

A "good" capitalist who invests a large sum of money in providing for a short-term need and satisfied that need through goods, services and providing wages is engaging in investment.

A "bad" landlord, who purchased vast tracks of natural resources say, after the breakup of the Soviet Union, and has nothing to extract wealth or survey for further potential value, yet will receive a windfall when they finally sell is still speculating. It doesn't matter if they hold those resources for one, ten or one hundred years. It still does not provide a single job, a single good or a single service.

Yet they do receive an income. From where does this income come from?

That question I shall leave to gentle reader to ponder.

(Why they're at it, p'rhaps they can consider why it is that that a tax on a good or service causes the price to go up and is passed on to the consumer... whilst a tax on land causes the price to go down and cannot be passed on to the renter..)

Lev, re your good capitalist vs bad landlord example, you're really just comparing wealth creation vs wealth transfer. While land speculation is no doubt one of the more blatant forms of wealth transfer, it's hardly the one one - most forms of insurance involve minimal wealth creation, and while lotteries and forms of gambling arguably provide an entertainment service, one could hardly argue that generating 6 random numbers is creating millions of dollars worth of wealth, and I'm sure other examples could be easily found.

In an ideal world it would only be possible to make money by creating wealth, but it's hard see how you would ever create such an environment. But you'd like to think a sensible taxation system could at least keep "wealth-transfer"-type enterprises to a minimum.
(And no, I'm not talking about the sort of wealth transfer that allows us to balance out income inequalities - there is, and probably always will be, a legitimate need for that).

Wiz-Nic, frankly if there was land available within 30 minutes of
the city for 120k$, I would not blink twice regarding where to live.
Building a house is not expensive, plus there is simply no comparison
when it comes to raising kids.

As to the US banking scandal, by what I can gather its more a question
of rules having been broken, rather then a lack of rules. Alot of
those subprime loans were packaged up and rated AAA, so some ratings
agencies will have some explaining to do. Some large banks also
gave guarantees on loans, the risks for which did not appear on
their balance sheets. So lots of people have alot of explaining to
do. With Enron, quite a few people landed up in jail eventually.
The same could happen in this case, the way I understand it.
But thats not going to suddenly return stability or credibility to
the US financial markets.

The US$ was the world's reserve currency, its heading for being
a subprime currency, as more people move money into Euros. That
has its consequences, even for us.

Yabby, I did say 30km, not 30 minutes. It's extremely rare you could ever average 60km/h into the city - the other night we drove home from the city at 1am Sunday morning, and it took us 35 minutes to drive about 15km.
And the blocks that are 120K are in places with no public transport, no parks/gardens, no shops, indeed, very little of anything within walking distance, making you utterly dependent on a car. You would also be lucky if you could find a job that was less than an hour's commute away.
Given the good likelihood of oil supply restrictions in the next 5 years, and the virtual guarantee of sky-high petrol prices, it's a good thing very few people do truly want to live in such locations.

Re the US banking system, you may wish to read Paul Krugman's take on the situation: "The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess."

http://www.nytimes.com/2007/12/03/opinion/03krugman.html?_r=1&oref=slogin

But accepted, rules were probably broken too. Time will tell.

Dropping in a little late here..but one thing that needs to be cleared up re. grputland's point about axing preferential tax treatment for non-productive investment (in established homes) is that is not a case of discriminating against one particular class of investment - eg. property as opposed to shares. It is a case of differentiating an economically worthless activity that adds nothing to production.

If that is discrimination then so be it. there is no provision for asset-classes in the Anti-Discrimination Act.

In any case residential property is not discriminated against according to grputland's suggestion as tax breaks would be retained for new construction. Policy should favour the creative not the passive.

Wizofaus is right in pointing out that this about distinguishing between "wealth transfer & "wealth creation". He is also right in saying that wealth transfer in various forms will always exist. There is no justification however for govt. & the tax office to be encouraging it.

No justification beyond the fact that the young & asset-poor have less in the way of political clout than the property lobby and the baby-boomer landlords.

There is a famous case in Tamarama (Sydney) where an investor bought a house for $4m, sold it 3 years later for $9m & paid a much lower rate of tax on that do-nothing enterprise than a small-business person or an employee would normally pay on their income. It sends a bad message to people that actually work for a living.

It also distorts the market. The optimum price of an investment property would normally be determined by the rental return. The ability to off-set rental income losses makes higher prices (& loss-making investments) viable for short-term capital gain. The (1999) CGT discount further assists.

Another key reason for differentiating between residential property and other investments is that it is the one area where the interests of investors clash with those of consumers. Participants in the financial (& commercial property) markets are all investors & they all generally gain from rising asset-prices.

First-home buyers do not.

The real discrimination lies in the fact that first-home buyers are disadvantaged in the market by tax laws that overwhelmingly favour the speculators.

Current house price / income ratios are untenable (& seriously delusional). $50k a year households cannot sustain $500K property values. In the emerging struggle those that regard residential property as homes for living will eventually prevail over those that regard it as another investment commodity.

- Mr Smith

"First-home buyers do not."

First home buyers certainly do gain, they just gain down the track.

Its interesting that yesterday's first home buyers, who might have
bought quite cheaply, today want every last dollar that they can
gain for their houses, as they have become today's investors.

AFAIK the West Australian Govt introduced a scheme, whereby the
Govt becomes co-owner of a property of up to 40%. But when the
place is sold, they will also take 40% of the profits. The initial
scheme was for 1000 houses a year. I have yet to hear if they were
rushed off their feet or not.

If investors are happy to invest in land, which pays no dividends,
they might well be prepared to invest in a % of peoples houses and
settle for a share of capital gain, when selling time comes around.
Its food for thought.

Fact is that whilst you have cities with rising populations and more
people wanting to live near the centre, supply and demand suggest
that the old location, location, location mantra is correct. So of course
properties in those areas will rise in value, faster then those in other areas

Yabby, the vast majority of first home "buyers" don't gain, because they simply aren't able to buy at all in the current market.
My wife works in a market research firm in a group of ~50 mostly 25-35 yo's, most of whom are looking for houses. None can afford one, despite them all earning well-above average salaries.

And yes, I'm redefining "buyers" to mean "those looking to buy", but it doesn't change the point the previous poster was trying to make.

Yabby wrote: "whilst you have cities with rising populations and more people wanting to live near the centre, supply and demand suggest that the old location, location, location mantra is correct."

Interesting that Yabby also argues elsewhere in favour of the precise factor which he, in this forum (correctly) identifies as the principle factor which drives up housing prices.

On 21 May 2004 I was astonished to listen on an "Australia Talks Back" program with perverse topic of the 'problem' of the then slump in the real estate market, an economist who worked for the Real Estate Institute of Australia (REIA), who openly welcomed and anticipated and increase in immigration to fix the 'problem'.

This is what I wrote in response:

(The REIA economist) expressed his hope that further immigration will
help the property market to 'recover', that is, presumably, that the
crowding of further new arrivals into Sydney and Melbourne, will drive
the already hyper-inflated housing prices even higher.

This confirmed my suspicion that the motivations of many advocates of
immigration were not as altruistic as they had once led me to believe.

Those on the lower rungs of our society were not informed or consulted
about the consequences of such an increase in our population, and so
now they can no longer afford what was affordable to them a generation
ago.

---

Since then they have got their wish with the (thankfully, former) Prime Minister Howard sneakily raising real annual immigration rates to possibly as high as 300,000 whilst pretending to be a strong defender of Australia's borders.

Population growth is not a given. It is a conscious political choice by the Government of the day. Those who stand to gain at the expense of everyone else, including, it would seem, Yabby (see "Skills shortage imported workers vs local" at http://forum.onlineopinion.com.au/thread.asp?discussion=1040#18555), try to convince the rest of us that it is inevitable and that there is nothing we can do to stop it.

(tobecontinued)

(continuedfromabove)

However, the rest of us should not sit quietly and allow the growth lobby change this country to become like Bangladesh further desertified through overuse, mismanagement, neglect and global warming in order to profit at the expense of the rest of us and of future generations.

If anyone is interested in reading more on the link between population growth and escalating housing prices, the discussion forum in relation to Andrew Bartlett's "A crisis in Housing affordability" at http://forum.onlineopinion.com.au/thread.asp?article=4834#53462&page=0

(However, I warn anyone who may be interested that this particular discussion was somewhat marred and bloated because of a troll. Since then, thankfully, that particular troll has not bothered me as much.)

---

Thank you wizofaus for making the distinction between 'profit' and 'wealth transfer'. The latter term is a more honest and descriptive term for things to which the former label is often applied.

Home buyers have more preferential tax treatment than investors, in that they dont pay ANY tax on a rise in real estate prices (notice I am avoiding the word profit). The $30,000 I made on my first house, enabled me into my second house in a better location. The $50,000 I made on my second house enabled me into a bigger house in the same location. I have put hard work into the properties, and upgraded them to make them more appealing. I have also been prepared to live in dumps (initially) in order to get ahead and eventually get into a house that I want to stay in. Problem is now that first home buyers arent prepared to drop their standards, and want the sort of house that their parents were able to afford only in their 50's. Which suits me perfectly well, as it means I will also have a market for my much improved homes.

"Problem is now that first home buyers arent prepared to drop their standards"

Country Gal, you, and others of your generation, are fond of making this claim.

I've already given an example of our first home, bought 6 years ago, a small 2-BR weatherboard on a main road, 15km from the city, is now on the market for $550K. Virtually no first home buyer can afford that.

How far exactly do you expect first home buyers to drop their standards?

Now, it's true that there are first home buyers these days buying high-spec* luxury-appointed houses - but that's because, being in out-of-the-way locations, these are often less expensive. Indeed, you can buy such a house for under $400,000, if you're prepared to live on the very fringe of the city, with no public transport, minimal infrastructure, and a good hour's drive from family, friends and most job opportunities.

(*That's being generous. They are often very cheaply made, but are very cleverly dolled up to look "high-spec").

Wiz, I have to agree with Country Gal. Your particular circumstances
sound particularly fortunate. I certainly know nobody of my generation,
who got it as easy as you. People put up with dumps in
outer suburbs, or they lived frugally for a few years, banked one
wage and lived off the other. After 5 years they had a sizeable
deposit together and could think of houses, babies etc. Now they
want the regular overseas trips, the latest fashions, mod cons
etc, then are amazed when they can't afford a house. I have yet
to see this generation, do without too much.

As to buying first homes, I haven't checked the statitics, but has
there been a massive drop in people claiming their first home owners
grants? That would tell you as to how many are buying first homes.

Daggett, population is a global issue. When Indonesia's population
hits 500 million in some years and they scream for asylum, will the
Greens let them in or let them die?

I remind you that West Australia takes up one third of Australia,
has 10% of the population and produces 40%-50% of our exports.
There are few places less populated then WA. So the problem of
migrants is not them, but that many go to Sydney or Melbourne.

You can't develop those resource projects without people and we
need them to pay our current account, as the ES are not achieving
the exports we need. If Eastern Australians don't want the jobs
here, why should we not use overseas labour?

I have purposely ignored this thread until now on the basis that it comes up every few months, the “left” demanding cheap (=uneconomic) rents and cheap (= uneconomic) house purchase prices for all, conveniently ignore what happen in the real world.

Somewhere along the path of debate the hoary old furphy about negative gearing, generally gets promoted by someone who is profoundly ignorant of what the terms means or what the tax implications and investment consequences would be if something were done to change the deductibility of investment property costs.

However the emotive and contentious pot-stirrer word (designed to strike down wicked capitalists in a single blow), “speculator” is used.

So who are these “speculators”, who deprive poor hard working Australians from buying the homes they presently choose to rent?

Significantly, many are other “Working Australians”, who have elected to defer consumption (save) and seek a good “return” for “saving”.

Some have chosen to save in property, rather than buy shares (riskier) or leave as a cash deposit (safe but very low return) or invest in property trusts (not Westpoint WA,).

We can also go around in circles about whether houses are “affordable” or not.

The reality is

Mortgage lenders have always lent up to a point where repayments are covered by disposable income (typically 30% of gross), to borrowers against residential real estate security.

This financing ability, multiplied by the annual income, roughly defines the price of houses.

Should interest rates increase by 1 % from say 8% to 9%, the values of houses will drop by around 12% because the capital borrowings supported by the financing amount will have become 12% more expensive. (9/8= 112%)

This was observed in the mid 1990s when, Keating ran a deficit federal budget and the interest rates spiraled up. House prices dropped in value between 1993 and 1996. in 1996, Howard came to power and the liberals put a tourniquet on the hemorrhaging of government debt interest rates fell and property prices rose.

So get over it. There is no “magic bullet” and governments messing with it will only make things worse.

By accusing the "left" of demanding "cheap (=uneconomic) rents and cheap (= uneconomic) house purchase prices", Col Rouge perpetuates the house/land confusion beloved of land speculators.

Cheap rents and prices of HOUSES can choke supply by failing to give adequate return on construction costs. But cheap prices and rents of LAND cannot choke supply because land has no construction cost.

He accuses critics of negative gearing of being "profoundly ignorant of what the terms means or what the tax implications and investment consequences would be if something were done to change the deductibility of investment property costs". I contend that if negative gearing were allowed for new construction, but disallowed for future purchases of established homes, it would stimulate construction because investors would prefer to build new houses than buy established ones. I invite him to identify the point of which I am alleged to be "profoundly ignorant".

"So who are these `speculators'?" he asks. They're the ones who are more interested in capital gains than current income -- especially the ones who buy vacant land and do nothing with it, or who buy empty buildings and board them up.

It is true that financing ability "roughly" defines the prices of house/land packages (not just houses) because land prices tend to soak up spending power. But how closely the financing limit is approached depends on the intensity of competition. If renters and home buyers didn't have to compete with speculators, competition would be less intense and renters/buyers would not press so hard against their limits.

As for being "left", I support complete untaxing of buildings and plant & machinery, and complete privatization of the provision of health and education, with a voucher system to ensure universal access. How "left" is that?

Yabby you claim: "People put up with dumps in outer suburbs, or they lived frugally for a few years, banked one wage and lived off the other."

If you were talking about, say, 30 years ago, then that was a very realistic option because the outer suburbs were only about 20 minutes drive from the city, and petrol was generally more affordable.

Further, the Australian economy has grown enormously since 30 years ago, and we're all supposed to be so much better off - as Howard was fond of telling us. So it isn't too unreasonable to expect that today's young would have better options available to them than those of 30 years ago. You might as well claim that a hundred years ago people built their own homes out of hand-made bricks, and anyone wanting more today is expecting too much.

At any rate, the housing affordability problem currently applies across virtually all incomes (except perhaps those in the very top 5%). But today, you can spend 8 years in Uni training to be a specialist surgeon, graduate into a job with a salary several times the average, and STILL not be able to afford much more than a "dump in an outer suburb". 30 years ago that was certainly not the case.

Look, the situation won't last - at some point it will start to unravel and there will be a lot of people losing a lot of money. There's probably not a lot that can be done to prevent that now, but I do believe a more sensible taxation regime can prevent the problem reoccuring in the future. And Col, that isn't "more Government meddling" - it's simply better structuring the existing influence that Government policy will always have over markets.

A few more misconceptions back there & the worst 3 are:

1.“First home buyers certainly do gain, they just gain down the track”

No they don’t – for 3 reasons:

Prospective first home buyers where I live in Sydney face a market where a median priced home costs 8.5 times average yearly income whereas their counterparts 10 years ago were paying 4-5 times (déjà vu). The long-term average is even lower. The current situation is unprecedented.

They pay much more than their parents did simple & plain.

This represents an effective (generational) drop in living standards. There is no reason to assume that this trend will continue as house price / income ratios are already exceeding realistic limits & you need only observe the default & foreclosure pattern in Sydney’s West or the U.S. to know what happens when that ratio keeps widening.

They would not “gain down the track” if this trend continued anyway – as owner-occupiers do not realise “gains” per se. The price of their one and only property rises & falls in parallel with others.

If they sell (move house) when the market is down - that tends to be offset by buying into a lower priced market. Overall, the advantage of selling into a higher market is similarly neutralised by the higher cost of their destination home.

Overall, an inflated property market does not realise gains for owner-occupiers it simply increases their capacity to borrow (and accumulate debt).

Go to
http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html
& see how much debt that is.

An owner-occupiers home is a consumer item, a household expense. It is not a business asset or a source of income & borrowing against it is no more a business transaction than hocking your wedding ring (although losing the ring is less traumatic & the bank a little cheaper than the hock shop).

Hence misconception # 2 (continued..)

Misconception #2:

“Home buyers have more preferential tax treatment than investors, in that they dont pay ANY tax on a rise in real estate prices (notice I am avoiding the word profit)”

No - they need the money to buy the next house and “profit” can only be realised by: ‘trading-down’ - to use the industry phrase or borrowing against equity neither of which signifies a real profit or gain.

What they can’t do use the combined facility of tenant (rental income) & the tax office (negative-gearing) to cover the cost of the property. This scheme works best for high net-worth investors on the highest marginal rate of tax. Hence wealth begets wealth.

Nor can the homebuyer deduct interest payments as a business expense. The ‘home buyer’(occupant) actually pays for their home.

Misconception # 3

“whilst you have cities with rising populations and more people wanting to live near the centre, supply and demand suggest” (etc etc.)

House prices in Sydney have risen 200% in recent years. Fortunately the population has not. Regardless of location, population as a factor doesn’t come remotely close to explaining it.

Classic supply & demand law relates to consumer markets & consumer markets do not generally experience 200% inflation within a few years.

Historically, the stock market has often experienced such rises. That sort of increase is synonymous with investment markets especially during a speculative boom.

In a speculative bubble-market, demand is driven by the expectation that other investors will continue to bid up prices regardless of intrinsic value (& the hope that the bubble doesn’t burst before you sell).

‘Irrational exuberance’ to coin a phrase.

Households are not directly affected by cycles (booms & crashes) in financial or commercial property markets. Housing is different.

The speculative boom in residential property took root in financial deregulation (loose lending) & low interest-rate monetary policies at the turn of the century. It was fuelled & ignited by Australia’s unique negative-gearing laws in combination with the (disastrously timed) 1999, 50% capital gains tax discount.

- Mr Smith

Mr Smith, of course owning your home is a business! Its your largest investment
and living where you do, has a market value. If you choose to live in a palace
along the coast, its going to cost you more then living in a dump in a slum. In Europe,
in some countries, the rental value of your house will in fact be added to your income
as taxable earnings, for you could rent it out at anytime and live far more cheaply elsewhere.

You are free to stay home and work on your house, which increases its value, whilst
I go out to to work and pay tax on every Dollar. You pay nothing.

If you make some capital gain, due to inflation alone, you pay nothing, I still pay.
That’s exactly why capital gains tax was reduced. They lowered the rate,
but removed the ability to compensate for inflation, which is a given every year.
Now you complain about lower capital gains tax, to compensate for inflation,
whilst homeowners pay zilch!

Of course homeowners are cashing in big time, all tax free. Look at the many
tree and sea changers. They no longer want/need to live near city central, so
are buying cheap country places and banking huge amounts for their retirement.
with no tax ever paid., as distinct from investors.

Wiz, 30 years ago there were no highways into the city. Today, in a place like Perth,.
they are everywhere. So today, with speed limits of around 110km, you can reach
the city in far less minutes then Km. If this is not the case in Melbourne, well then
it’s a Melbourne problem, not an Australian problem.

Yup things have improved in 30 years, but one thing has not changed. There are still
people who earn huge amounts, who spend more then they earn and who cannot cope.
Then we have people on pensions, who have also saved a few pennies, who
cope wonderfully and are quite content with their world.

Its all very relative to our experiences.

Grputland” I invite him to identify the point of which I am alleged to be "profoundly ignorant".”

When you take an open statement and narcissistically presume I am talking to you, personally, it shows an ignorance to other peoples existence beyond yourself.

“if negative gearing were allowed for new construction, but disallowed for future purchases of established homes, it would stimulate construction”

Displays the crass ignorance to the differing roles of different types of “speculators” (investors)

Some speculators are called developers, they take existing buildings or green fields, carve them up and develop new buildings, then they sell and move on to something else but

who do they sell those properties to ?

they sell them to “investment buyers”, who hold the property and rent them understanding negative gearing currently applies (= a tax treatment basically in line with every other form of investment, except things like say, movies which get special breaks).

If the tax implications of negative gearing did not apply, two things would happen

1 the developer would have not make as much return either from
A no investors buying his houses
B those investing, adjusting the price downward to maintain an acceptable level of financial return.

This would slow the new house development cycle and probably mean some developments would not go ahead because the developments were non-viable.

2 with a reduced supply of rental houses and those remaining in the rental property investment market needing to adjust rental rates to maintain an acceptable level (return on risk) of investment return -

Rental rates on residential property would go through the roof.

As for “who buy empty buildings and board them up”

If you own a car, you decide if to drive it or garage it.

If you own a house, you decide to rent it out or if the risk of tenant damage is too high, to lock it up.

Your property, your risk.

Re "I support complete untaxing of buildings and plant & machinery”

I am an Accountant. I don't know what that means, not sure a registered tax agent would either.

As I pointed out to Yabby on another forum "They're not really that poor" at http://forum.onlineopinion.com.au/thread.asp?article=6576#100198 :

You have done here exactly what you always do.

You simply restate, over and over again, the same
assertions, without any regard to earlier arguments
in response to those assertions. This serves no
useful purpose other than to bloat the size of
the discussion and waste the time of others who
wish to seriously discuss the issue at hand.

-end-of-quote-

And I see that he is intent on doing the same on this discussion as well. To others, I advise not to waste any more of your time answering the same arguments which have been made many times before by Yabby and refuted many times before.

The simple facts which Yabby pretends not to have noticed are that:

1. "... average house prices have gone up, from 3.3 times the median wage in 1970 to 7.4 times in 2005. This must be a major stress on any budget." ("Living standards and our material prosperity" http://forum.onlineopinion.com.au/thread.asp?article=6326#92771). Roughly similar figures were given above by MrSmith at http://forum.onlineopinion.com.au/thread.asp?article=6697#100759

2. As a consequence, it is necessary for at least two people to work (and sometimes, at that, for one to even work at two jobs as I have shown).

3. Mortgage loan repayment periods have been extended well beyond the maximum of 20 years that existed up until a generation ago to 30, 40 and in some cases 50 years.

These facts should have made it obvious to even a moron that the problem is extremely serious. And why would it be otherwise? How else would it have been possible for land speculators to have made all those spectacular unearned windfall profits in the past unless someone else was to be made to pay for them?

The problem is real and it is here now, and isn't going to be fixed, except at an unacceptable cost to the environment, our quality of life and future generations by Yabby's half-baked 'solutions':

(tobecontinued)

(continuedfromabove)

* bulldoze yet more bush or farmland and pave it over with concrete and asphalt.
* everyone move further even further away from where there are services and jobs when petrol prices are set to only rise further and spend 3, 4 or more hours per day commuting to and from work.

Regarding roads, congestion: It is a serious problem in Brisbane and fixing it, if it can possibly be fixed at all, is going to cost a fortune thought increased rates, taxes and toll charges in the order of $48.00 per toll road (5x2x$4.40) per week.

As I have shown, it's a waste of time trying to put such facts to the likes of Yabby. I suggest leave him out and only engage with those who want to discuss the matter at hand honestly.

---

MrSmith, your posts are spot on EXCEPT that you have ignored the evidence that population grwoth must caus property prices to rise. As I wrote above, I heard this coming form the mouth of a spokesman for the REIA. See also, as just one of many examples:

http://www.realestate.com.au/review/apr072/prices_soar.html?from=review

The rich will get even richer this year as the nation approaches another massive property boom, a property expert has tipped.

Michael Yardney - who runs buyers' advocacy service Metropole Property Investment Strategists - ... says Australia was on the cusp of one last momentous real estate boom caused by strong immigration, a lack of land and an increasing proportion of single-person households. As the price climb continued, home ownership levels would also continue to fall, he said.

--end-of-quote--

Also, read Sheila Newman's excellent Thesis "The growth Lobby and its absence" (248 pages + notes, 2.6MB pdf) downloadable from http://candobetter.org/sheila

Daggett, if more and more people moved away from services and jobs, market forces will demand that eventually services and jobs will move to them. Commute times can be cut significantly. Governments can have a hand in speeding up such changes by giving incentives for businesses to open in regional areas. Population growth in the regions means that services will be at some stage upgraded.

On the other hand you have some regions crying out for workers of all types and offering all sorts of incentives to get people there (and I am not just talking about mining either). Housing is medium-priced, but still much cheaper than the city, and people would be lucky to have a 10min drive to work. Where is the pioneering spirit that this country used to have??

Col, I agree with your last comment re "untaxing". Not entirely sure what was meant, but suspect that these items are expected to be tax deductible. If so, then ignorance is being displayed again, as depreciation on plant and equipment IS tax-deductible (with the net result of not paying any tax on purchases) and there are provisions that allow for the write-off of capital improvements (buildings), that have the same effect. Its just that deductions are spread over the useful life of the item (an accounting concept as you would know), rather than being immediate.

Soaring property prices are obviously influenced partly by population growth, but real estate bodies make this and inadequate land supply the ONLY reasons for housing unaffordability. Karl Fitzgerald's study in just one Melbourne inner suburb shows this isn't the case, because 10% of the land is being held off the market. Producers can't hold tomatoes or cars off the market, because tomatoes rot and new cars rust. So, Fitzgerald's point that land prices are high because rates and land taxes are too low to create a real 'property market' where speculators can't simply sit on vacant land seems to be a valid one.

Col Rouge wrote: "...you take an open statement and narcissistically presume I am talking to you, personally..."

No, I presumed I was AMONG those he was talking to, and invited him to explain how his comments related to me. He couldn't.

"Some speculators are called developers..." His words, not mine. Developers do a lot of "new construction". Some even double as house builders; but even the others build roads, kerbs, drains, etc. By implication, I'm happy for them to negative-gear while they do that, but not while they merely hoard the land. That selective policy would encourage "developers" to develop.

Col then asserts: ``If the tax implications of negative gearing did not apply...

1 the developer would have not make as much return either from
A no investors buying his houses
B those investing, adjusting the price downward to maintain an acceptable level of financial return.

This would slow the new house development cycle...'' etc.

WRONG as regards my proposal that negative gearing be "allowed for new construction, but disallowed for future purchases of established homes", because that policy would cause investors to PREFER freshly developed lots, on which they could readily EXPAND THE SUPPLY of accommodation (this being the point of "new construction").

At worst the developers, instead of building houses themselves, would sell lots to investors who would be newly motivated to build. But even that preference would not arise if "new construction" included purchases of homes not previously occupied. There is actually a precedent for this: the Howard government's temporary supplement to the first home owners' grant was available only for homes not previously occupied. That good idea was quickly buried.

Col writes: "If you own a house, you decide to rent it out or if the risk of tenant damage is too high, to lock it up." But if Col really cares about affordability, he will support tax policies that encourage owners to take the risk -- e.g. holding taxes on site values.

Complete "untaxing of buildings and plant & machinery" means no taxes on capital or on income from capital (land isn't capital; see http://homepage.ntlworld.com/janusg/coe/!index.htm).

Yabby, I've spent quite enough time in and around Brisbane and Sydney (not to mention cities overseas) to know that freeways make very little difference to travel times during the most popular travel hours. And actually Melbourne did have freeways 30 years ago, though certainly they've been extended outward since. However the bulk of the traffic is still traveling along much the same roads that existed 30 years ago, designed to carry about half the traffic they do.
If Perth has somehow managed to avoid this problem, then kudos to the governments and planners overseeing its construction. But if that is your yardstick, then you have a very warped view of the world.
Realistically, the major population centres of Australia can't be redesigned in a hurry, and that's where the bulk of us live (and want to continue to live). If Perth has so far avoiding the housing affordability problem, then young families there should count their blessings.

Further, I don't believe that it is an acceptable solution that the only place a young family can buy their first house is 30 minutes drive away from where their parents lived, or where their jobs are. The more dependent we are on cars, the more exposed we are to likely future disruptions of the global oil market, the more we continue to contribute towards various forms of pollution, the more we continue to expose ourselves to the risk of road fatalities, etc. etc. A genuine, long-term solution to housing affordability will also allow the vast majority of the population to have the freedom the choose alternative forms of transport for the bulk of their travel needs, ideally their own two legs.

Daggett, to me all knowledge is tentative. I will change my mind tomorrow, if you
can put up some convincing arguments. So far you have not, but I can’t argue
every point, given the 2 post limit. I tried to change that, but Graham and the majority
of posters were not in favour.

Yes house prices have risen strongly, but many other variables have also changed.
Women have burnt their bras, most want to work today. Interest rates have halved,
population has increased, all these things have affected house prices. Thirty years ago,
people still signed up for a thirty year mortgage, much as today. Usually for a much
smaller, simpler house, with less mod cons.

Australia is nearly the size of the US, with around 7% of the population, so has land
to waste, including farmland. If land is limiting home ownership, why should
converting farmland to housing land be a problem?

Jobs are anywhere where there are people, for they need services. Large cities
are more a product of cheap oil, then anything else. Look how people lived before
mass transport and cheap oil, in regional communities. Switch the power off in
a big city and you have disaster.

The people that I see struggling for houses are in fact the divorced,
who lost their homes. Its harder for singles to buy, as they are
of course competing with two income families for the same houses.

Wiz, I think Country Gal is correct, some Australians seem to have lost their
pioneering spirit. To insist on living in a big city, on high value real estate,
within 30 minutes of your family, is quite unreasonable. Have you never
heard of email ? :)

Fact is that you can’t just keep squashing more and more people into limited
real estate, unless of course you enjoy apartment living, as some do.

If you do insist on these things, then paying high real estate prices is to be
fully expected, unless of course you live in a regional area along with your
family.

Yabby - you seem to be ignoring the study that started this topic. More than 10% of the inner urban area is vacant and unused. That doesn't seem to describe 'packing people in'?

Yabby,

'"Thirty years ago'"? "A much smaller, simpler house"?

Most Australian houses were built before 1977 but they are ALL far more expensive now in relative terms. Most are the same size they were then & the older ones, on average are the dearest.

In your own inimitable way though you made an interesting point earlier on. I do concede that home-ownership represents something of a grey area between the tenant, who is a consumer in a pure sense & the investment property that is purely a business.

Then again, as grey as you paint it home-ownership is still not a business. It is not formally enterprise nor an operating source of income. Regarding those ‘sea-changers & tree-changers’ you mentioned, good point – except that they aren’t making a capital gain strictly speaking, they are ‘trading-down’ to a cheaper location.

If they’d moved to a similar place near their original location there’d be no gain. Now, here’s the rub. The cash benefit that they realised by trading down to a cheaper residence is increased by the general rise in property prices & that money is worth more in the broader consumer economy than it is the housing market.

In these circumstances there is an advantage in converting equity to cash because inflation in the housing market is far greater than it is the broader economy.
The situation is the reverse for the first-home buyer whose net income is now worth far less in the housing market.

The advantages gained by these ‘sea-changers’ (& other passive windfall-earners) are no magic-pudding. They’ve benefited at the expense of first & future homebuyers who are effectively bearing the cost.

That said, it would be nigh impossible to devise a credible way of taxing those that have converted home equity to cash on the time/value differential between the two – quite unworkable & quite unnecessary.

Good policy would draw the housing market closer into line with the broader consumer economy. It would ease volatile demand pressures by discouraging speculation in established homes. It would improve supply by rewarding quality construction & long-term investment.

Daggett,

I am pleased that you think my posts are mostly ‘spot on’. As regards population, I am not suggesting that population isn’t a factor. It is.

What I am saying is that the increase in population relative to housing supply cannot come remotely close to accounting for a 200% price rise within a few short years.

I am pleased to say that we haven’t had that sort of population increase. That is the sort of increase that is almost invariably associated with a speculative price bubble in an investment market.

Its a different dynamic & restraining population won’t essentially fix it, although it would help somewhat by easing immediate pressures.

By the by, assume most anything the real estate industry says to be misleading. Their interests are in higher prices/greater turnover (higher commissions, more commissions) & a lower rate of home-ownership (more investment, more tenancies, more rental commissions).
_______________________

Further regarding Supply-side:

Published research by Rory Robertson of the Macquarie Bank, an interest rates analyst, confirmed (the obvious) that falling property values in Sydney’s outer-metropolitan areas had no impact on prices elsewhere in the city.

They are different markets. We now have a so-called “2-speed property market” here & that is a social divide made manifest, quite unprecedented too. The falsehood in the idea that land-supply alone will resolve a property bubble is all too apparent. The sub-text, the real truth is that the proponents of this idea don’t want policies that would discourage excessive demand. They want to protect & maintain inflated property values.

They accept the idea that many among the current generation of buyers have been locked out of the main market & their solution is to relegate them all to the worthless, neglected outskirts of nowhere in particular.

Like it or not however, this solution simply doesn’t work. As large sections of the metropolis are restricted to older/ higher-income home owners, the younger / lower-income workers in local services face increasingly arduous commuting or near-permanent tenancy. The social & transport implications are intolerable.

Eventually, something has to give.

- Mr Smith

Freddington, I’m not ignoring the study, simply looking at the bigger picture.
When those 10% are full, then what? Fact is if more people want to live near
the centre of a city, it will push prices upwards. People sit on vacant land for
all sorts of reasons. In my experience, often its to eventually cram even more people
onto expensive land, by combining blocks, then building duplexes, units, apartments
etc. Sometime one has to wait until the little old lady next door falls off the proverbial perch
to do that, as she refuses to sell at any price.

Obviously Yuppies and Dinks will be able to outbid most single income families with
kids for prime city real estate. Similarly expats with fat wallets, returning to Australia
from low tax places like HK, Singapore, or the Middle East.

Mr Smith, when people buy houses these days, they worry about future values,
ability to renovate and add value, they stand to make or lose hundreds of thousands
by their decisions. Some get it right by being at the right place at the right time,
others by careful planning about the future. It might not be somebody’s full time
employment, but its still the largest investment that most people make and people
in general aim to make every single Dollar that they can, when they sell. These
are not business type decisions? I can buy and sell things without formally registering
a business name. That does not mean that what I am doing is not
making business types of decisions, therefore its a business of some sort.

Inflation in the housing market is only greater, in areas where there is a shortage
of land, when more people decide to live in a certain area. Otherwise house prices
are governed by building costs, which are pretty similar to normal inflation.
Smart people bought cheap houses in regional areas, whilst regional areas were
declining in population. Houses were selling for well below their construction
costs. Now that many regional areas are booming again, house prices have
lifted significantly, to reflect population shifts.

"Wiz, I think Country Gal is correct, some Australians seem to have lost their pioneering spirit."

...er...no, it's now the 21st century. Do you honestly think that there are still significant options for making a living by staking out a claim in the middle of nowhere?

"To insist on living in a big city, on high value real estate,
within 30 minutes of your family, is quite unreasonable. Have you never heard of email ? :)"

I'm sorry to hear you value your family so little...even if you were joking.

"Fact is that you can’t just keep squashing more and more people into limited real estate, unless of course you enjoy apartment living, as some do."

The population density of Australian cities is extraordinarily low by international standards (Sydney = ~340/km2, London = 9360/km2, Paris = ~24000/km2, Manhattan = 25,846/km2) - there are plenty of opportunities to increase it without having to be squeezed into apartments. And at any rate you're ignoring the fundamental problem that a significant percentage of prime real estate is owned by investors and speculators would are competing in a hopeless mismatch against first-home buyers. I'm willing to bet that if purchasing an existing second property was illegal, property prices would be half what they are now.

grputland, “because that policy would cause investors to PREFER freshly developed lots, on which they could readily EXPAND THE SUPPLY of accommodation”

Investors are individuals, they choose the type of investment which suits the sort of risk and return they want.

The notion that an investment has a less attractive disposal value because it will NOT attract a tax benefit

WILL IMPACT ON THE RETURN OF THE INVESTMENT

WHICH WILL ULTIMATELY REDUCE THE VIABLE PRICE SOMEONE WILL BE PREPARED TO PAY

OR

WILL INCREASE THE RENTAL INCOME COMPONENT OF THE TOTAL INVESTMENT RETURN (HIGHER TENANT RENTS).

OR

WILL TURN INVESTORS AWAY FROM HOUSING INTO DIFFERENT OPPORTUN ITIES, MAYBE “OFFSHORE”, WHERE THE TAX POSITION IS CLEARER, THUS DEPRIVING ALL DEVELOPERS FROM BEING ABLE TO FINANCE ANY SUPPLY.

AS FOR “means no taxes on capital or income from capital (land isn't capital);”

The Australian tax acts clear state (not verbatim), land, buildings, plant and equipment are “Capital” purchases, their use is not totally expensed in the year of purchase. Value of diminution, over time, is reflected by way of depreciation allowance.
Plant and equipment attracts differing depreciation rates, varying upon the expected life (I depreciate my computers at 33% pa for a 3 year life). Buildings, are assumed 40 years and for land, no depreciation allowances is available due to the nature of its continuing existence.

Land is, however a capital investment. Not withstanding its failure to attract depreciation allowances. The “Land” component of an investment, when it is disposed of, will still attract capital gains tax liability, just as any building which stands upon it.

As for http://homepage.ntlworld.com/janusg/coe/!index.htm

Some conspiracy theory dross. Pure propaganda published by someone looking to blame the world for his own shortcomings. Not worth a brass razzoo.

Unlike you, I do not rely on quoting psychotic conspiracy economics websites for my posts,

I prefer references to tax laws, accountancy practices and the professional maxim for records to reflect “a true and fair view”. The games I model and earn a significant income from are well the beyond the “amateur night lightweight league” you “dabble” in, sparky

Wiz, if owning a second existing property was illegal, who would finance rental
homes? Not everyone wants to commit to debt for years. Many young ones now
head off overseas or interstate, or prefer to spend every last Dollar on good living.
They don’t want those commitments and ties.

I remind you that it was Govts who warned baby boomers to save, as there would
not be an old age pension for them. So they have, many have bought houses. But
us baby boomers can’t take it with us. When we fall off the proverbial perch, we’ll
pass it on to you younger lot. You’ll just have to be patient, we are not quite ready
to go yet :)

As to your criteria, of 30 minutes being “reasonable”, if people stuck to that I can’t
think of a single resource project that would go ahead and farming would have to
shut down too. Its just totally unrealistic in today’s world. If you can achieve it
fine, but don’t think it “unreasonable” if you don’t. Most mining projects are now
fly in-fly out, guys don’t see their families for weeks. People move, marry interstate
or overseas. That’s just how life pans out.

There is heaps in your claimed “middle of nowhere”. I won’t even go into that
here, except to say that some people are just so conditioned by city living, that
they are often nervous in the country and just can’t see it.

AFAIK they are already going to apartments in places like Melbourne, so I’d say
that trend will continue. It makes for cheaper living in cities, but I personally could not handle
it. All a bit like the human zoo, if you ask me, but then I’m biased. I hated city
living, when I was forced to endure it for years. I know, we are all different.

I guess it makes sense for singles, who can’t compete with couples when it comes
to purchasing a home, to purchase a small apartment, then land
is not such an issue.

Referring to the significant fraction of vacant lots and boarded-up houses in the suburbs, Yabby asks "When those 10% are full, then what?"

Fair question.

Shifting the tax burden off productive activities and onto the holding of land would encourage land owners to use their land productively or to sell it or let it to someone who will. This would help to fill in the wasted vacant lots. But even after the wasted sites were built upon, the holding tax would make property owners intolerant of vacancies and would therefore strengthen the bargaining positions of renters and buyers relative to landlords and sellers.

Meanwhile, Col Rouge's confusion continues. He writes: "The notion that an investment has a less attractive disposal value because it will NOT attract a tax benefit..."

If negative gearing is available for (say) purchases of homes that have not been previously occupied, that "notion" will NOT apply to such purchases and hence will NOT discourage construction of homes, but rather will encourage construction in preference to mere acquisition, and will therefore boost supply. Hence the dire consequences that follow from that "notion" will NOT occur.

Col continues: "The Australian tax acts clear state (not verbatim), land, buildings, plant and equipment are "Capital" purchases..." Yes, and common law clearly states that buildings are land. But so what? The LEGAL meaning of "land" is one thing, and the defining ECONOMIC characteristics of land are another: whereas capital can be produced by private effort, land cannot. But the PRETENCE that land is capital for economic purposes is useful for undercutting the case for selective taxation of land, which is why it was invented.

He then says that the land component of an investment "will still attract capital gains tax liability, just as any building which stands upon it." Correction: ONLY the land will make a "capital gain"; the building will depreciate.

CONTINUED...

...CONTINUING

The history of the doctrine that land is capital is documented in http://homepage.ntlworld.com/janusg/coe/!index.htm , which Col Rouge describes as "Some conspiracy theory dross..."

A conspiracy theorist is one who takes the Christian doctrine of Original Sin far too seriously and applies it far too consistently (and/or who accepts the implications of Darwinian natural selection concerning the morality of inherited behavioral tendencies) to the point of believing that the behavior of an organization sometimes reflects the alleged sinfulness of its founders, benefactors, leaders, or members, and who thence is led to absurd conclusions -- for example, that organizations sometimes pursue the interests of their founders, benefactors, leaders, or members at other people's expense, or that the reasons given by organizations for their actions are sometimes less than candid. Crazy stuff.

Be that as it may, it doesn't take a conspiracy to produce concerted action. It only takes a large number of people with similar interests independently responding to the same stimulus. (When you shine a light on a photodiode, why do so many electrons suddenly jump out of their orbits and start conducting? Is it a conspiracy??)

Col concludes: "The games I model and earn a significant income from..." Are these economic models? If so, do they include location as a variable? If not, how can they have anything useful to say about property values? Besides, economic phenomena take place in space and time. When economic models include at least two spatial dimensions and one time dimension, the undersigned "sparky" will take them seriously.

--- Gavin R. Putland.

How’s that old Col Rouge back there calling folks “psychotic”? Check his post. Far-out.

Its odd how negative-gearing’s so necessary that every other nation gets on just as well (usually better) without it. And that 1999 50%CGTdiscount seemed so unnecessary before then.

grputland, OK-cool, um-interesting, remember don't -get-baited.

Now Yabby,

(just quietly..)

You say: “Obviously Yuppies and Dinks will be able to outbid most single income families with kids for prime city real estate” .

We’re not talking about “prime” - prime? I’m referring to whole districts in this city where a mix of wealthy & working class, young & old lived for generations, districts that are now slowly becoming a creepy-strange, part-gentrified, highly fogey-fied boutique retirement zones with schools, local clubs, traditional small businesses & local workers disappearing. All for the for the sake of a, fruitless, fools-gold bonanza that is nothing more than a monumental game of musical chairs - perpetrated (partly) at the expense of the ‘untimely investors’ that always get burnt. Except that this isn’t just investors, dot-coms or shares this one drags the entire housing market into the frame. This one numbers the young, first-home buyers & tenants among its victims & all for no good cause other than to render a windfall for some passive speculators, landlords & well-situated oldies.

I lived in one of those districts when low-income households could rent or buy (modestly but) easily. I remember how easy & affordable the lifestyle was - not anymore. That was real ‘prosperity’ not the current variety.

“Prime”? a lot of the places being bought by well-to-do couples were traditionally occupied by blue-collar families. They’re not ‘prime’ they’re a sow’s ear passed–off as a silk purse. Big income doesn’t buy the sort of property that it used to. The mini-yupps have settled for ordinary old assets with inflated values adding the imagination that it takes to pretend its all fabulous.

And this business about buying wisely & working hard to ‘renovate & add-value’. Around here renovations more often diminish value. The serious money seeks out heritage qualities & ‘original features’.

continues…

Re. your suggestion that: “when people buy houses these days, they worry about future values” & “in general aim to make every single Dollar that they can, when they sell”..

This presumes that “most people” share the so-called aspirational attitude towards housing. They don’t.

This familiar attitude is far from universal. The seriously rich have far too much in the way of assets & income to focus on using their home to gain advantage.
Most among the working & middle classes are mainly looking for a home – a suitable place to live. Many have lived in the same district for decades, sometimes generations & they are more interested in family & liveable communities than they are in “every single dollar”.

Did anyone else notice that the term ‘aspirational’ failed to appear in the election campaign? The “A” word got the big A. Little wonder.

Finally, the notion that:

“Inflation in the housing market is only greater, in areas where there is a shortage of land, when more people decide to live in a certain area. Otherwise house prices are governed by building costs, which are pretty similar to normal inflation”… is a beauty.

Polite words can’t begin to describe that. Nonetheless:

It has been reliably observed that over the last several years beginning in Sydney, house-prices in all districts in almost every capital city have risen by between 100 and 200% (conservatively averaged). Even in areas where prices have since fallen back marginally (10-50% below peak) they are still at least double what they were several years ago.

Now according to your suggestion this would mean that somehow more people (indeed a great many more people) have decided to live in every area in almost every city. Either that or we have suffered an annual inflation rate of somewhere between 13-20% plus.

Our official population & inflation statistics indicate that this is not the case.

Daggett could have been more gracious but he is right in suggesting that you’d do better to actually follow the thread rather than cultivate a cycle of futile repetition.

-Mr Smith

Yabby, I wasn't seriously suggesting that owning second existing properties should be illegal.
Although of course you could solve the problem of having the government own all rental properties - however I can't see that being too popular in this day and age.

And no, clearly not absolutely everyone is always going to be able to live within less than 30 minutes drive of family/friends etc., but mining operations are very much the exception - as you said, people don't set up there for life, it's largely a way to make a quick buck.

Ultimately it's not up to you (or me) to decide where people want to live and work. They all have their own various reasons for doing so, and make various trade-offs between property prices, travel distances, amenity availability etc. etc. Clearly if enough young families did all start to decide to live in regional towns or move out of cities, there would be no affordability issue. But at the moment there isn't sufficient incentive, and to be honest, I doubt there will be in the foreseeable future (it's conceivable that super advanced forms of personal transport and communication will eventually change this, but by then the world will be a very different place).

grputland ‘When economic models include at least two spatial dimensions and one time dimension, the undersigned "sparky" will take them seriously.’

Your comment tells me two things

With only 2 dimensional variables, you are obviously too easily pleased and hence too gullible to be able to construct reasoned argument in the area of differential taxation (as your post tends to prove).

I have, for my own business purposes, developed a housing investment (negative gearing) model

The adjustable variables which that model considers are (not exhaustively):

The investment buy price.

Mortgage Gearing ratio

The escalating sell price (annual % growth over time)

The holding time

The buy costs, stamp duty etc

The disposal costs

Income and Capital Gains Tax law

The investors individual marginal tax rates and tax circumstances.

Annual operating costs including interest, maintenance etc

Annual rental income based on a % of the annual escalating capital worth (including land) and offset by depreciation allowances.

Interest borrowing rate

Tax deductibility of buy costs

Calculated future value (determined from the expected capital growth rate)

Future CGT

The resultant IRR of the investment (so much more useful than NPV).

In simple words, a fiscally holistic approach to individual property investment over time.

More than 2 variables ha – ha. I count 15+ there (including a user elected time dimension) , that’s probably too many for you to encompass but then, I figure I am not talking to someone who has any real likelihood of ever being able to afford my skills, merely someone who wants to direct a tax bias, despite their complete absence of the implications evolving from differential taxation policy.

Elected governments generally act for the interests of the common denominator, hence the goal is lowest standard acceptable, rather than the best achievable.

I believe in a society where the individual is paramount and (small) government merely serves those individuals.

Small government and strong individual reliance always produces better societal outcomes than big, meddlesome and interfering government and weakened individual reliance, in every area of human endeavour.

Yabby Footscray is not a desirable area of Melbourne although moving the abattoirs out of Kensington has made it less smelly. The Goode Island toxic dump is still operational. However housing prices have risen and families move to new suburbs on the outskirts.

These new suburbs on the outskirts have to have schools, bus services, health centres and staff to operate them. Meanwhile the facilities in the inner suburbs are underutilised. The staff who live in the inner suburbs commute to the outer suburbs to work while the resides of the outer suburbs commute to the inner suburbs for work. Might sound OK in Perth but its unworkable in large cities like Melbourne, Sydney and Brisbane.

I think urban planners ought to be able to control the usage of land releases and in the City of Geelong vacant land is rated as though there is housing on the block to discourage land speculation.

Then there is the separate issue of taxation treatment of investment property. In the USA you pay capital gains tax on the family home.

Col Rouge wrote:

I believe in a society where the individual
is paramount and (small) government merely
serves those individuals.

Small government and strong individual reliance
always produces better societal outcomes than big,
meddlesome and interfering government and
weakened individual reliance, in every area of
human endeavour.

--end-of-quote--

It is time that this Big Lie, invented to serve the interests of the world's wealthy elite at everyone else's expense, was laid to rest, this time, permanently. It was thought to have been laid to rest following the world-wide catastrophe which began with the crash of 1929, but since 1947 a network of neo-liberal ideologues using abundant funds flowing from corporations managed to resurrect the tattered reputation of lassez-faire capitalism with catastrophic results for the world, as Gerge Monbiot has shown at http://www.monbiot.com/archives/2007/08/28/how-did-we-get-into-this-mess/ :

Their purpose was to develop the ideas and the language
which would mask the real intent of the programme - the
restoration of the power of the elite - and package it
as a proposal for the betterment of humankind.

--end-of-quote--

Naomi Klein's absolutely riveting as well as frightening "The Shock Doctrine" (RRP AU$32.95 see http://www.naomiklein.org/shock-doctrine http://www.naomiklein.org/shock-doctrine/reviews http://webdiary.com.au/cms/?q=node/2204 http://johnquiggin.com/index.php/archives/2007/10/29/monday-message-board-93/#comment-199501), published earlier this year, shows conclusively that wherever the extreme free market polices that Col Rouge advocates have been applied they have been a catastrophe for society at large and the environment: Chile, Argentina, Brazil, Uruguay, Bolivia, Poland, Russia, South Afica, China, the UK, Iraq, Sri Lanka, Canada, South Korea, Indonesia, Thailand, the US. etc. (In Australia we have only been cushioned from some of the worst effects of free market policies by our mineral export boom at the expense of future generations and the world's environment.)

See, also my post in response to the article "They're not really that poor" by Peter Saunders, another free market extremist, at http://forum.onlineopinion.com.au/thread.asp?article=6576#100775&page=all

Neither Peter Saunders nor Col Rouge have responded to this post.

"I believe in a society where the individual is paramount"

Um...then it's not a society. We already know you don't believe in society, but fortunately we have a democracy, and the vast majority of us recognise that humans are fundamentally social beings, and do best with a combination of individual enterprise, and the pooling resources to act collectively.

Yabby, I'm with you on this. People need to be a little open to opportunities. Even with mining, hardly all site are remote. Some of the more remote ones are even big enough to support large towns on an ongoing basis (eg Kalgoorlie). There are also lots of regional towns that are still pretty close to the big cities. Close enough for a day visit to family anyway. I'm afraid I am from good farming stock, and still have a dash of the old pioneering spirit about me, as have other family members. Of 6 kids that grew up on the farm, two have returned to take over the farm, 1 lives in the nearest town (still 45 mins away) and works as a professional, 1 lives 11hrs drive north, and 2 live several days drive west (1 farmer and 1 miner).

Funny but I bet the people who cant see that housing decisions are investment decisions would be the same ones who would jump up and down about farmers not treating their farms as businesses. The days when where we lived and what we did for a living were purely life-style based are well and truly gone. I have little sympathy for those that dont treat housing as an investment. Like everything else in life it is not a right. Yes, to "cash-in" so to speak you generally need to trade-down, but it shouldnt really be trading down, but seeking opportunity. If you are too lazy to seek opportunity then nothing I or anyone else can do is going to help you.

As for the inner-city market squeeze, the current impact of demand should show you that even if negative gearing were removed, the problem would not be solved. There is enough high-income in the inner-city that the result of the removal of negative greaing would simply result in higher rental prices. If you want to think of negative-gearing subsidising anything, it is subsidising rent levels.

Mr Smith, prime real estate can be purely about location, even if a slum stands there.

I don’t claim to know much about Melbourne real estate, but people behave in
similar ways, in many parts of the world and I tend to learn from that. What we
have seen in other cities, is areas close to a CBD, some area is redeveloped,
e.g. in Melbourne the Docklands area. Next thing high earning yuppies move
into adjoining working class suburbs, buy up the real estate and rebuild most
of the suburb. People like you might lament that fact, but that’s the reality of it.

As to my point which you ridiculed, I did some homework :) As we have been
discussing Melbourne, I had a look around the REIV website.

According to them, the median house price for metropolitan Melbourne, up to
Sept 07, had jumped from 340k$ to 431k$ in 5 years. That’s around 5.2%
per year. Inner city values, where the population is heading, have jumped
a lot more, to 677k$ Yet outer “affordable” suburbs like say Broadmeadows,
have grown from 175k$ to 216k$ in 5 years, that’s about 4.6% a year according
to my calculations. Clearly in these areas, actual house building costs play a major
role, not real estate costs, as in the inner city areas. That was my point.
If you compare regional areas, you will get a similar result.

As to why developers board up houses, how much of that has to do with
State tenancy laws? I don’t know Victorian laws, maybe somebody else on here
does. But in my experience, whilst there are silly investors, there are also plenty
of smart ones. Why would anyone board up a house, unless they had very good
reasons? Tenants provide an excellent weekly cash flow. The question is, how
easy is it in Victoria to ask them to leave, when the time comes to redevelop the
land and how easy is it to get rid of so called tenants from hell?

Just when it looked we were running out of classic misconceptions
Country Gal says :

“ The removal of negative greaing would simply result in higher rental prices. If you want to think of negative-gearing subsidising anything, it is subsidising rent levels.”

Really, how ?

To begin with most landlords (and their agents) charge as much as they can realistically expect to receive, - and rent at “market value”. Ie. a price that is as high as the market will bear.

Some might charge less as a favour to friends or relatives, others, maybe a bit less (just a little bit) in order to secure a stable tenant & minimise vacancy periods.

If you’re thinking that negative-gearing increases the supply of rental properties that notion is only relevant where it contributes to investment in new construction.
Put simply you can’t increase the supply of housing without building new houses,
An increased level of investment in established homes merely redistributes ownership among the existing stock.
By increasing the proportion of tenancies relative to owner-occupied homes it decreases the level of home-ownership (which is now down to 58% in NSW).

When there is a sell-off of investment properties those houses are not demolished nor do they evaporate. Someone moves into them. Supply does not decrease in relative terms because among the population of tenants there is always an ample supply of prospective first–home buyers ready to fill the gap.

Thus, as the number of rental properties decreases (reducing supply) the number of tenants (especially high-income tenants) decreases - reducing demand.
The proportion of first-home owners increases & that is how the rate of home-ownership increases. Currently the reverse is the case.

Yabby,

An unedited quote:

'House prices have increased at three times the rate of wages in capital cities over the past decade according to a new report.
The research by Deutsche Bank analysts Emily Behncke and Sally Clarke says “While wages have increased 56 per cent on average, house prices in Australia’s major capital cities have increased 168 per cent since June 1997”

Article: “City house prices easily outstrip wages” page 59 (‘Property’ section) Aust. Financial Review 25/9/07

I chose that one because it covers the subject entirely in 2 short paragraphs. There is plenty more where that came from. The Fin. Review isn’t available for free on the net -- but The Age is. Try this one:

http://www.theage.com.au/news/national/house-prices-world-highest/2005/11/30/1133311106610.html

The Age article is from 2005 but its excellent. I have some good ABS references on my PC but its out of action for a while. I’m currently using my Mac.

Anyhow that covers that. I needn’t elaborate.

On a more conciliatory note:

Earlier on you said: “us baby boomers can’t take it with us When we fall off the proverbial perch, we’ll pass it on to you younger lot. You’ll just have to be patient, we are not quite ready to go yet”

A good point & a worthy sentiment. The only problem with this on a broader national level is that “reverse mortgages” are increasing at a rate of knots.
Some people (god bless ‘em) are using these to raise finance for their kids, a far greater proportion however are using it to fund retirement. There is nothing inherently wrong that per se, they are entitled & many of them no doubt justified. Its just that in previous eras even the relatively poor often received an inheritance – now the banks get it instead.

- Mr Smith

Daggett “It is time that this Big Lie,”

Under the “lassez-faire capitalism” model which you criticise, you are entitled to disagree, indeed, the process is designed around diversity, not only of resources and individuals but also their views.

The “all powerful Government” model, which you seem to support, can best be described by its historic proponents and implementers

example

“While the State exists there can be no freedom; when there is freedom there will be no State.”

Of course, on matters of “truth”

“A lie told often enough becomes the truth”

The same anti-capitalist also noted

“The Goal of Socialism is Communism”

The essence of his views come down to this

“It is true that liberty is precious - so precious that it must be rationed.”

However, the practice was

“It is true that liberty is precious - so precious that it must be denied.”

I said, initially, “Under the “lassez-faire capitalism” model which you criticise, you are entitled to disagree, indeed, the process is designed around diversity, not only of individuals but their views.”

Comrade Lenin’s view was less accommodating.

To suggest a “Big Lie” shows an ignorance to real “Lies”

The lie of “socialism” in promising everything and delivering nothing but slavery to the state.

Socialism and its goal (communism) are about the power of the state to crush the individual it is there to serve.

The capitalist model recognizes individuals and supports the right to aspire to their potential.

Any dissent by you would not be tolerated under the objective goals of a more powerful State. Ask the millions who died under Lenin, Stalin, Pol Pot or any of the other despotic "socialist" regimes, China included.

“Libertarian Capitalism” and the idea of individual private ownership and discretion over resources, prevailed in the Cold War because, ultimately, it is produces the better solution for all people.

As for not responding on other posts, sometimes I do and sometimes I find the questions so banal as to be totally mind numbing, I guess I found your comments on the other threads so mundane as to induce momentary coma.

Col Rouge what are you smoking? Stop it, its not good for you!

I concur with Billie's concern, but I would hasten to add that it should be a purely personal choice whether or not one chooses to abuse one's mind and one's body with hallucinogenic substances. As long as no harm is done to others, it should be treated as a medical problem and not one for the police, law courts and the prison system.

*now the banks get it instead.*

Ah Mr Smith, but the banks don't keep it! Look up the top twenty
shareholders of our banks, they are nearly all super funds.
Those super funds hold 1.2 trillion $ on behalf of Australian workers.
So that money is tucked away, for the benefit of the retirement
of the workers, whom it was taken from in the first place.
1.2 trillion $ is about as much as the whole ASX is worth.

As to house prices, one could assume that they would have been
relatively low in 1997, in the first place. Many of that borrowing
generation had been severely scarred by 18% interest rates and that
includes some banks who had lost billions. People had learned to be
cautious about borrowing too much money.

Now we have a whole new generation, who have only known good times
and relatively low interest rates. We have record employment levels,
a booming economy, easy money available and people have borrowed
to the limit. Yup, in some areas its a housing bubble, and no doubt
it will eventually pop, as the Economist predicts.

Clearly housing costs have not increased the same in all areas.
More people, perhaps concerned about the peak oil claims, are heading
to live within 15km of the CBD, or on the coast. Outer areas which
are less popular, have moved more in price in relation to the cost
of building. It might now cost 3 million to buy a house in Toorak,
but outer suburbs of Melbourne still have houses in the 200k price
range. Location matters more, as the real estate people have claimed
all along. More householders are aware of that and are including that
information, when it comes to their decisions about investing in
houses.

I am less concerned about the peak oil story. Australia still has
huge amounts of gas in the NW. How many people
have converted their cars to gas? At 80c or so a litre, it makes
for reasonable transport costs.

Yabby,

I marvel at your ability to pack so much fallacy into a short space & remain so determined to cling to it.

We don’t have “record employment levels’ even JW Howard referred to it as a ‘33 year low in unemployment’. The generation that owns most of the property had full-employment from the late50’s through to the early70’s.

What we do have is rental vacancies at a record low & interest repayments (as a proportion of household income) at a record high.
Most now recognise that the significance of the interest rate is relative to the price of the property (& the size of the mortgage).

Gentrification & decreased affordability are not the same thing, one affects specific locations while the other affects all locations to varying degrees.
The fact that there are cheaper places on the remote outer fringes of some cities does little to compensate for a system that so blatantly serves to disadvantage first-home buyers generally.

At times I have found myself telling younger people not to be abusive toward baby-boomers & landlords, that its not personal its about policy - then other people tell them black is white, there is no problem, that they are a “generation, who have only known good times” & that just makes it that much harder.

As regards the borrowing habits of the “scarred” & the good time generations Deputy Reserve Bank Gov. Ric Battelino recently observed that:

“household debt is often portrayed as being driven by young couples trying to buy their first home, a more accurate description is that it is mainly being driven by older, higher-income households that are trading up to higher quality or better located houses, buying investment properties and taking out margin loans to buy shares”.

and that:

“it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise”

http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html

That doesn’t imply that mortgage stress isn’t a problem for the 1st homebuyer. It confirms the degree to which wealthier households are using a greater debt servicing capacity to advantage - risks notwithstanding.

Mr Smith

Mr Smith, my point is that this argument is far more complex,
due to a number of variables, then what we are being told,
which is basically:

“Ah those poor first home buyers, its all the fault of those evil
baby boomers”

The biggest change that I can see is in fact the change in
expectations by the younger generation of Gen Y etc.
They want it all and they want it now! Hey, we worked for
30 years to get to this point and it did not come easily.

In the 70s it was extremely difficult to get yourself into financial
difficulties, as nobody would lend you the money in the first
place. Banking was highly regulated, unless one saved a substantial
amount with a bank, applications for loans were simply rejected and
there were few other options. In today’s deregulated banking this
has all changed, even the unemployed can buy a new plasma screen
on credit. No wonder that more people are getting into financial
difficulties.

Sorry if I forgot to specify “33 years” in terms of record employment.
Given 350 word limits, I thought the gist of the argument mattered
and would be understood, not the minor details. Fact is that when
I look around as to what is happening here in WA, I don’t think anyone
has ever seen anything like it. Young people have more opportunities
and options then ever before. I wish our generation would have had
the same. The present young generation perhaps don’t realise just how
fortunate that they are.

Our generation, unable to obtain loans, found solutions, not just blame
another generation. We worked, we compromised, we thought outside
of the square. We might have been broke, but we were young and had
our lives ahead of us, to find solutions, which most of us did.

Yes average houseprices have increased, mainly in the Yuppyville
districts, close to the CBD or ocean. If first home buyers want to
buy in these areas, it will cost them. Affordable houses are still available
in other areas, if they lower their expectations.

Well I'm certainly not blaming baby boomers for investing in housing - my mother is one of them, and given her lack of superannuation, and the fact that from a taxation point of view it simply made far more sense than investing more into alternatives, she did the logical thing, and I would have done the same in her place.
I don't think any individual of any a particular generation who makes a decision on where to invest their money can sensibly be blamed for a situation that they couldn't have reasonably predicted.
In fact I'm not particularly interested in blaming anyone, I just want to see the government take some realistic steps to ensure that a) the fall-out from the eventual bubble deflation isn't too catastrophic and b) a similar situation is prevented from reoccurring in the future. And you can argue all you like about how it shouldn't be the government's responsibility to look after us all and ensure we're sensible with our money: that may well be the case, but the fact remains that government has tremendous influence over what investment options individuals consider attractive, and therefore much take a share of the responsibility in determining the collective result of how those individuals choose to invest their money.
And if a government can't insure against serious market distortions and economic instabilities and inequalities, then it's of little use at all.

And Yabby, I challenge you to come to Melbourne or Sydney and spent a week trying to find a house that the average young family looking for their first home would be reasonably be able to afford. And if you can't find something that is considerably better than the house you first bought 30 years ago, then what on earth has the last 30 years of economic growth been good for?

Wiz, you might not have blamed baby boomers, but some have. The way
I see it, there are major changes going on in real estate, as our population
grows, especially in ever larger cities. 15km to CBD has become prime
real estate with the most capital gains, so that’s where a lot of investors
are investing. So are yuppies, dinks, higher income individuals who
need to work and want to live near the cbd. If you work for say Maquarie
Bank, you probably earn enough to live in this area, if you are a teacher,
a nurse, a dentist, etc, you can work wherever there are people. There
are now many industrial estates, logistics centres etc, in outer areas.

Billie made an interesting observation:

*The staff who live in the inner suburbs commute to the outer suburbs to work while the resides of
the outer suburbs commute to the inner suburbs for work.*

Perhaps as energy becomes more expensive, people will take more trouble
to find employment closer to where they live.

Things certainly have changed for the better in 30 years, but don’t forget
that young families have often only just left home, they have their lives in front
of them and earning capacity ahead of them. They will benefit for the rest of
their lives, but sadly it’s a bit much to expect it all already in one’s twenties,
even today.

I’ve taken up your challenge and gone internet shopping :) First stop was
Mirvac and Australand, both property developers for first home buyers.
Reasonably priced new homes are available in outer suburbs. In Melbourne
Australand have their Cranbourne development. Unlike your claim, there
are plenty of shops, schools and other facilities there. Clearly they would
employ people too. The median house price for Cranbourne is 230k$.
When you are young, you have to start somewhere. That sounds affordable
to me, one can always trade up later on. Where am I wrong, according to
you?

Yabby ,

- Yes, there are complex “variables”, primarily: Liquidity, Deregulated lending, Population, Planning, Demographics, Fiscal / Tax policy etc.

We know that, its been extensively covered.

You say:

“Our generation, unable to obtain loans, found solutions, not just blame
another generation.” etc. etc.

“Young people have more opportunities and options then ever before. I
wish our generation would have had the same.”

“Things certainly have changed for the better in 30 years”.

And I still marvel. Blaming another generation” & their allegedly excessive expectations is all virtually all you’ve done.

“30 years” again? – I’m old enough to remember 1977 & it was great. I don’t see what’s so bloody marvellous now. Life was easier, more fun & more affordable. Give me a time-machine & I’d happily zap straight back & the only thing I’d miss is this internet gizmo.

This whole we-had-it-tough thing is absurd. That line belongs to the people that battled through The Great Depression & WW 2 – the seniors not the baby-boomers.

The baby-boomers got (at various stages) post-war prosperity, full employment, the social & cultural revolution, free love, free education & the overwhelming influence that comes with being the biggest demographic.

Subsequent generations (at various stages) got rationalism, unemployment, HECS, AIDS, “family values” & unaffordable housing. They will bear the burden of global warming.

“Evil baby boomers” ? Hmm - another unedited quote.

‘(ANZ Chief Economist, Saul) Eslake says the biggest demographic in Australia – the baby boomers – will continue to influence policymakers particularly in an election year.
“Essentially its about the baby-boomer generation which for about half its life has been happy to rearrange the intergenerational flow of funds to the expense of other generations”

Financial Review ‘Perspective’ 31/3/07

That was referring to superannuation, spending priorities, well, everything really.

One needn’t react defensively though. A bit of objectivity doesn’t cost anything & it doesn’t hurt. Rather than assume we had it tough you might pause to consider if we actually had it easy.

- Mr Smith

Yabby, Cranbourne is barely even part of Melbourne - as little as 10 years ago it was quite a distinct town in its own right.
If your job is located anywhere within 15km from the CBD, you could easily be looking at 3 hours a day commuting - the main freeway that connects Cranbourne to the rest of Melbourne is little more than a car park during peak hour. According to whereis.com, it would be a 45km drive for me to get to work, a similar distance to my mother, and up to 60km away from other friends and members of our family, all of whom we exchange visits with regularly, not least for babysitting duties. It's also at least 30km away from the nearest *decent* shopping options - the main Cranbourne Mall is, well, somewhat limited.
You say the median price is $230K - well 5 years ago that's exactly how much we paid for our previous house in Blackburn, which itself is 15km from the city, and a 15min drive to work, family and friends.
As I said before, today, that house is on the market for $550K (the new owners have only been there a year, oddly).

It's all a matter of perspective. Even as a privileged baby-boomer, my first house was 60km from my workplace, requiring a minimum of three hours commute a day. I was surrounded by similarly privileged people, all with mortgages stretched to the limit of their earning capacity.

We didn't think in terms of affordability in the general sense of "is housing affordable", but in the specific terms of "can we afford this and also feed and clothe ourselves".

I am not at all convinced that the equation has changed significantly. Except that kids stay at home longer these days, thanks to indulgent baby-boomer parents who can't bear to send them out into the world to fend for themselves. This quickly turns the kids into a bunch of cargo-cultists, who won't venture out until they can afford to live to the same standards as they enjoy under the parental roof.

They then sit around and moan about how "the government should make houses more affordable".

Sorry, I simply don't believe there is a problem. For every sale there is a purchase. If houses are unaffordable, how come people are affording them every day of the week?

Baby boomers generally bought houses that were equivalent to 3 times their gross earnings. In Cranbourne the median house price is $320,00, the median wage is $58,000 or 5 times a workers gross wage.

Those Cranbourne estates are next to land that is currently rural but will be rezoned industrial then used for an inland port for 450 container movements per day. There is also a toxic waste dump in Cranbourne with housing estates behind the fence.

My friends who hire low paid casual labour try to avoid hiring Cranbourne residents because if there is an accident on the freeway the workers arrive 2 hours late. They are not paid enough to cover the cost of petrol burnt waiting in a traffic jam.

Billie “Col Rouge what are you smoking? Stop it, its not good for you!”

I was responding to daggetts claim of “the Big Lie” of capitalism.

I countered with the obvious reposte to the far bigger and multiple lies of socialism.

We live in a comparatively libertarian-capitalist society which has held the excesses of socialism in check thus far.. I will smoke and express what I want, when I want, with no deference to you or your sensibilities.

That is the point of my comments.

We do not live under the jackboot of advanced socialism (communism) where the state is responsible for everything and no one is responsible for the state.

ccacofonix “treated as a medical problem and not one for the police, law courts and the prison system.”

Your comment reminds me, of those who dared dissent with the state view in the people’s paradises of USSR and its satellites, had their beliefs
A “treated as a medical problem” and were locked up in state psychiatric asylums or
B “one for the police, law courts” and imprisoned in Siberia.

and those who happen to follow the religious beliefs of Fulang Gong in China, simple, sub-human conditions in the Chinese gulag.

If you think, for one minute, that when the likes of daggett suggests capitalism is “the Big Lie”, I am ever to let the massive abuses by the socialist states against their own citizens go without mention, then you are a deluded fool.

Ultimately if you don’t like the benefits which capitalism delivers over socialism, I suggest you go to where socialism is de-rigueur (like Costello suggested for those who want to live under sharia law) and leave Australia to its plight.

Strange, how all these lefties want the benefits of libertarian capitalism, including free speech and the right to personal views so they can slag off the very system which tolerates their excesses. Why they would support and seek to impose socialist systems which gag dissent and would presumably gag them, is completely beyond me.

The only words which explains it are

“Rampant Hypocrisy” (= typical socialism)

What a waste of space Pericles' last post was!

So, Pericles doesn't "believe there is a problem"?

What planet has he been living on these past two decades?

Has he noticed in the papers and in the news the plights of millions of fellow Australians or the hard data in Mr Smith's post:

Prospective first home buyers where I live in Sydney
face a market where a median priced home costs 8.5
times average yearly income whereas their counterparts
10 years ago were paying 4-5 times (déjà vu). The
long-term average is even lower. The current situation
is unprecedented.

--end-of-quote--

?

How about the fact that mortgage repayment periods are being extended from a previous maximum of 20 years to 30, 40 and, in some case, 50 years? How about the fact that two and sometimes three or more incomes a necessary to pay a mortgage?

I am sure Pericles' could have easily found somewhere much closer than 60km from where he worked if he had wanted to. Most likely he made that choice in order to have a large yard or to live in a rural location. These days many homebuyers simply don't have that choice, and on top of that face escalating fuel prices.

----

There are a lot of astonishing leaps of logic in Col Rouge's most recent post:

To advocate any Government intervention in the economy makes one a 'socialist' and of course the real goal of every socialist is 'communism', that is necessarily Stalin's gulags or Pol Pot's Killing Fields.

So, presumably, if the Latin America military juntas in the 1970's, 1980's and 1990's had not implemented the extreme free market agenda of Milton Friedman, Friedrich van Hayek and their followers from the Chicago School of Economics, whilst murdering, torturing and imprisoning hundreds of thousands of those opposed to those policies, Latin America would today be ruled by Khmer Rouge style regimes?

Whilst I would admit to having occasionally, in the distant past, used hallucinogenic substances, I could not contemplate touching whatever it was that Col had taken in order to come up with this.

Mr Smith, I agree that the houses in question do not disappear if investors sell out. I am not suggesting that the investors WILL sell out. But take it that we have a record low vacancy rate in much of the country. That means that if investors as a whole want to raise their rents, than they jolly well will, and tenants will have to adapt or get out.

Added to that, even if a moderate number of properties were removed from the rental market and placed into home ownership, not as many as you might expect would be lining up to be homeowners. There is currently a VAST leap between what rental payments cost and what home ownership cost, even with a decent deposits. To give an example I am trying to sell my home at the moment for a moderately priced $160,000 (country). With a 10% deposit, the weekly payments are around about $245. Weekly rental is worth about $170. That's a significant jump, particularly if it is a young couple thinking about having children soon (and either losing an income or paying for childcare).

Wiz, in checking around for affordable housing in the Melbourne area, I’m
sorry for not taking into account where you work, where your mother lives
etc, but I don’t know these things.

My point was that there is in fact affordable housing around for first
home buyers. REIV claim the median house price in Cranbourne to be 230k, not 320k
as claimed by Billie. Ok, so the shopping is not up to your standard,
how sad :)

Blackburn is clearly a suburb being targeted by rich yuppies, for the median
house price hardly moved for 5 years, then jumped by 250k in 6 months,
unlike the battler suburbs.

Smithy, I’m not complaining at all, just responding to those who have been
and continue to. Pericles makes a wise observation, its all relative. First
home owners struggled 30 years ago, they still do, they still buy houses.
Some just complain louder then others, some find solutions and get on with
it.

The WA export based, globally focussed economy where I live, it seems
is quite different to yours. Rationalism, the global economy, reduction
of tariffs etc, have been huge beneficiaries for today’s generations.

Availability of credit means that young kids in their 20s can go out and
start their own businesses and earn 6 figures, which many do. Consumer
goods, food, wine, telecommunications, services, roads, travel,
workplace conditions, etc have all improved amazingly in the last
30 years and most are much cheaper.

Aids has been around for 25 years or so, not exactly something new.

Anyone who wants a job in WA, can find one. We are down to the
unemployable, those on drugs etc. If fact we need a bit of a recession
here, to bring things back into some sort of reasonable state, unlike
right now.

Yes, median house prices have increased as more wealthy Australians
plow their money into their houses, to gain better houses and tax free
profits. But there are still affordable houses around plus two incomes
to pay for them, unlike 30 years ago, when many women still expected
to be kept.

Yabby, I was with you until that last comment!! I dont believe that young women 30 years ago expected to be kept, although perhaps some of the older ones did (but then they were not usually struggling first home buyers either). It WAS a lot harder to get childcare, and even find an employer that would hire a mother though.

Anyway, lets not get off topic! The problem is that Blackburn is a really nice suburb. Safe, good transport etc etc. I dont live in Vic, but I have friends that have lived in Blackburn for years. It really is a nice place. Every bleeding-heart throwing in their two-bobs worth here would do well to remember that first home buyers have rarely been able to afford the nice places first. I agree whole-heartedly with your comment about the shopping at Cranbourne - if that's all there is to whinge about people need to get a life. Put more money into paying off the house so you can afford somewhere you'd prefer rather than wasting money shopping anyway. Look at this as a bonus!! All you need is a supermarket anyway.

I just cant get over the complaining! Few are living in bark huts anymore or living off rabbit and galah, so arguably our standard of living has greatly improved. It is no where near as bad as many would have you believe.

Sorry to say it, but you guys really have no idea.
6 years ago, as a young couple with two above average incomes, we were barely able to afford a 2br weatherboard house in Blackburn. 25 years ago, my parents, at the same age, on a single reasonably-good income, were able to afford a 4br brick house in Mont Albert (<10km from the CBD), which now has a median house price over $800,000.
Today, a young couple on a single income can't even afford a fairly basic home that's 45km from the CBD, and on two average incomes that's about the best they can hope for.
As a result of the house price rise in Blackburn, we were (just) able to afford to upgrade to a slightly bigger 3br 1970's brick house (still not as nice as the house my parents had in Mont Albert), but in a less desirable suburb, meaning considerably longer drives to our most common destinations (and no public transport options).
And Yabby, if you live in Cranbourne, almost everything else in Melbourne is an hour's drive away - except perhaps occasions on the weekend when the freeway is moving well, then it's 30min.
As far as the quality of the shopping goes, while it's not something personally would bother me much, the quality of consumerables (including food) that is available within a reasonable distance does have a significant impact on standard of living. As I said before - why shouldn't today's first-home buyers expect a better standard of living than you had 30 years ago? They would hardly expect you to have put up with the standard of living of the generation 30, or 60 years before you.

Wiz, perhaps CG and I understand this argument far better then you think,
as we have lived through both sides of it.

Trying to compare your life with that of the late 60s early 70s, is like
comparing apples and oranges, as things are so different. There were
no flash shopping malls, no VCRs, faxes, computers, ipods, fast food
joints, wine industry, flash restaurants to speak of, etc. Most had a
3 by 1 fibro, a Holden, (forget air conditioning ) a black and white
telly and a transistor radio. Entertainment meant going to the beach
or to the drive-in occasionally. People lived frugally, took some sandwiches
with them when they went anywhere, as that is what they had been taught.

As they lived so frugally, one wage covered it. Yup houses were cheaper
as wages of workers to build them were cheaper. People were poorer,
Melbourne was half its present size, so less competition for land.

It is virtually impossible to compare your spending habits with those
of your parents, as there are so many variables.

What I did was feed some basic data into the REIWA housing affordability
website. I assumed a net income for you and your partner, of 5000$ a month,
given your claims. Most likely you earn far more. I assumed a car payment
of 95$ a week, 8%interest and a 30 year housing loan. According to them,
you should easily be able to afford a loan of 268k$, based on those figures.
Given that you paid 200k for your Blackburn house, even if you borrowed it
all, that should have been a breeze.

Wiz I know couples who earn 100k$ a year, who cannot cope, I also know invalid
pensioners who have something left each week. We all have different spending
habits, but ultimately we are all responsible for our own actions.

In my experience, doing it tough for a while is actually quite character building.
You really start to appreciate what you have, rather then whinge about what
you don’t have.

Country Gal, I’ll address your comment when I have some spare words.

Yabby,

Pericles wasn’t making “a wise observation”. He was attempting satire or at least it appeared that way, a bit like ‘Groundhog Day’ really.

As for your list: “Consumer goods, food, wine, telecommunications, services, roads, travel, workplace conditions, etc have all improved amazingly in the last 30 years”

I’m really sorry that Perth was that bad 30 years ago, Sydney wasn’t. Around here most of that stuff was just as good or better 30 years ago if not the “improvement” has had an equal & opposite downside.

A lot of the things you mentioned may have improved for those that emulate the leisure & travel lifestyles portrayed in the weekend magazines of broadsheet papers .For others, some them young, in regional areas or on lower-incomes the easier, globally provincial life of 30 years ago was more affordable, less stressful & better.

Some in the regional towns remember when they had banks, trains, post offices & hospitals.

Your reference to the “The WA export based, globally focussed economy” is another way of saying ‘a quarry for China’. Those that are entirely relying on the mining boom are putting their faith in Asia’s economies rather than our own. At least the Asians (for all their faults) invest most of their money in productive industries. The Reserve Bank document that I referred to earlier:

http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html

clearly indicates that of all the money borrowed for investment purposes in Australia over the last ten years, far more was sunk into to the speculative boom in housing than any other industry & nearly all of that went into speculation in the price of existing homes rather than construction. It is little wonder that we are relying on the Asians.

I think that many of us here would prefer that Australians put the bank’s money into something more useful than driving up the price of assets we already own.

Any policy that enables that outcome is only there for the benefit of those that gained an advantage & some of the beneficiaries it seems will say virtually anything to justify their lot.

MrSmith

Yabby, I have to confess I wasn't entirely sober when I wrote that post, so apologies for any offence - also I slightly mistated our case: it was only me earning an above average salary, my wife's was almost certainly below average at the time - and no, we weren't pulling 5000 net a month at that time. By "barely afford" I meant it was absolutely the most debt we felt comfortable taking on. Yes the bank would have given us slightly more if we'd asked for it, but we knew my wife would be leaving work at some point to have a baby, and didn't want to be living hand to mouth just to pay the mortgage.
Again though, I'm not complaining about our situation - compared to young couples looking for their first house today we were very lucky (indeed, we were lucky even 6 years ago).
And while it's true that there are many consumerables, luxuries and lifestyle choices available to today's youth that weren't available 30 years ago, the cost of those isn't really all that great, and forgoing most of them wouldn't make a huge difference to what sort of mortgage is affordable. At best they're the difference between being able to save up a decent deposit and not, but while important, that only gets you so far. I also can't help wondering whether most people would happily trade in their wide-screen TVs, leather sofas and patio heaters for a chance to live anywhere that doesn't mean having to spend 3 hours a day sitting in traffic - were such a choice feasible.

Country Gal, certainly in this area, 30years ago there was still a huge debate
going on as to women working or not. Things were not black and white.
Some women wanted or needed to work, some women claimed that they
didn’t get married to go to work, some men didn’t want their wives to work.
30 years later, the results of those decisions are fairly plain to see.

Smithy, Pericles mentioned that life is relative, very true indeed. Irony can
be mixed with wisdom you know.

You might frown on our “quarry”, but it saves you from living in a banana
republic. The sheep that you relied on before, collapsed some time ago.
ES manufacturing has yet to show that it can compete in a global economy.

Yes Australians have invested in both housing and superannuation. No point
saving money in bank deposits. Inflation takes half and tax the other half,
so people don’t.

Your RBA url shows that owner occupied debt servicing ratio has hardly
changed in the last 10 years. Household gearing is in fact still quite reasonable.
Yes, people with high incomes have borrowed to upgrade their houses.
Australians are clearly wealthier then ever before and love living in flash
houses in suitable locations.

Wiz, with consumers like yourself around, who love their shopping and
their credit cards, I know that I’m onto a good thing with my bank
shares and Westfield shares :)

That living frugally for a bit, has certainly paid off.

.

Yabby wrote: "You might frown on our 'quarry', but it saves you from living in a banana republic."

OK, fine.

We can argue, as a nation, about whether or not we have we have any choice over this, but I agree with Mr Smith that your attempt to prettify this ugly reality, by depicting it as an "export based, globally focussed economy", is dishonest.

---

Yabby wrote: "owner occupied debt servicing ratio has hardly changed in the last 10 years".

I find your resort to isolated facts and data taken out of context also to be dishonest.

The ratio from 1981 until 1996 rose from 12.8% in 1981 to 19% in 1996. Combined with a further increase of 'only' 3.5% in the last 10 years to 22.5% we get a total increase of 9.7% to 21.5% since 1981.

This takes no account of the fact that there are most likely more incomes in each household and also that the loan repayment periods have been extended beyond the old 20 year maximum to 30, 40 and sometimes 50 years.

Even if, in the unlikely event that it were to be shown things were as bad back then as it is today (see below), then all that would prove to me is that things were unacceptably bad back then as well.

---

Here's some more stories about the price that ordinary Australians are now being made to pay in order to support the profligate lifestyles of property speculators, landlords, mortgage brokers, bankers, real estate agents etc:

http://www.thedaily.com.au/news/2007/dec/14/homeless-coast-families-forced-live-cars/
Homelessness on the Sunshine Coast has reached crisis point, with hundreds of families forced to live in their cars because they cannot find affordable accommodation.

http://www.thedaily.com.au/news/2007/dec/14/rent-hikes-trigger-housing-action/
... skyrocketing private rental fees are adding further
pressure to waiting lists. ... rent hikes that in the past five years, have seen the median rent for a two-bedroom unit rise from $170 per week to $260, ...

http://www.thedaily.com.au/news/2007/dec/13/single-mums-accuse-landlords-discrimination/
All they want for Christmas is a place to call home. But for sisters Yvette and Michelle Lallyette, their simple wish is looking more and more out of reach. ...

Well spotted on the debt-servicing ratio, Daggett.

Yabby,

It doesn’t surprise me to find that you focussed on the one aspect of the RBA document that suited your outlook. Certain members of the press did the same thing.

Unfortunately your supposedly reassuring debt-servicing ratio is ultimately dependent on asset-price/debt ratios where the asset-price is a variable (it falls) just like the interest rate (it rises) but the debt is a constant.
Which is why the RBA Deputy Gov. concluded by observing that:

‘ the household sector is running a highly mismatched balance sheet, with assets consisting mainly of property and equities, and liabilities comprised by debt. This balance sheet structure is very effective in generating wealth during good economic times, but households need to recognise that it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise.’

We've been set up for a fall.

Those “flash houses in suitable locations”
are usually the same old houses in the same old locations merely overvalued.

You conclude that : “Australians are clearly wealthier then ever before”
But inflated property values don’t constitute a real increase in wealth. Paying more for the same old assets may suit those that already own them but it represents a decline in living standards for those that don’t - which is why another central bank, the Bank for International Settlements noted that:

“‘rising house prices implied a redistribution of wealth from future buyers to existing home owners rather than a net increase in wealth’..

(‘Households warned against perils of rising debt’ - Fin Review 25/6/07).

Not all Australians are part of the gerontocracy that did well out of that. Its what Wizofaus was referring to when he discussed “wealth transfer” as opposed to “wealth creation”. Deja vu

As for the “Banana Republic” First you need to be a republic. Then you might consider that Australia has the worlds 4th largest current account deficit in absolute terms, despite the mining boom & partly due to our lending institutions borrowing overseas to fund the housing bubble.

- Mr Smith

Daggett, nothing dishonest about export focus in WA. I remind you that we also
have some of Australia’s most efficient and innovative farming industries.
10% of Australia’s population producing 45% or so of exports.

Perhaps its you taking things out of context. I remind you that in 1981, the
Australian financial sector was still regulated, so lack of access to credit was
a major problem. Deregulation of the financial sector means interest
margins on housing loans have dropped from 400 points to 100 points,
to the benefit of consumers.

If you read the document as whole, clearly the RBA is not too concerned
with peoples ability to service their loans. My point remains. Debt servicing
ratios of owner-occupier homes has changed little in the last 10 years,
as the graph clearly shows.

Smithy, the same old houses? I remind you that the floorspace of new homes
being built in NSW for instance, is now 50% larger then 20 years ago. All
around Australia’s suburbs, you will see renovations, redevelopments and
upgrades going on in the housing industry. Indeed, we now live in the
world’s largest houses. In the 60s people aimed for a 3 by 1, now they aim
for McMansions. Expectations have changed dramatically.

Deregulation of the financial sector has meant that over 40% of Australians
now directly own shares, people can borrow to start businesses, etc.

If you really want to help the poor, then shut down the pokies!

Yes, we have a large current account. If Australians had been encouraged to
save more much earlier, they might have done so, we might own more of
our assets, foreign investors less, less BHP dividends etc would be sent off shore.

Instead, our past relatively high marginal rates of taxation and poor tax treatment
of returns on savings, have meant that people have ploughed their money into
those areas which benefit them most, ie upgraded houses, the profits of which
for home owners, are tax free. People see houses as an investment, a fact which
you overlook.

If the housing bubble bursts, so be it, houses will be cheaper

Groundhog Day again.

OK Yab you said :

"If you read the document as whole, clearly the RBA is not too concerned with peoples ability to service their loans".

To begin with the graph you referred to earlier only covers owner-occupier’s loans &
No, they're not too concerned about the current position of middle-aged, rich folks that are carrying a lot of the debt. Although the document concludes by saying that they have left themselves highly vulnerable to a fall in asset-values or a rise in interest rates.

Those two prospects are either inevitable or already happening.

The data (Graphs 8,9 &10 plus text) also reveals that the debt-servicing burden for ‘households in the bottom half of the income distribution’ has increased substantially since 1996.

That’s what comes with trying to compete with the wealthy when the wealthy borrow too much.

And by the way (once again) most homes are not new homes. Most are decades old.
The fact that Mc Mansions are too big does not account for the other 90-odd % of houses.
Renovations don’t triple the price of homes. Sometimes they diminish the value.
Most of the expensive homes in this expensive city are in the oldest areas & the redevelopments (apartments / townhouses) there, though expensive are generally quite small.
McMansions although gross are often low-quality & relatively cheap.

Costello tried that half-smart trick of confusing a phenomenon in the building of new houses with the price of homes across the entire market. And then he stopped – probably when Crosby-Textor advised him that swinging voters were too wise to fall for it.

Your comment about the pokies was by far the best thing you’ve said but it has little or no bearing on this topic.

Beyond that I haven’t “overlooked” anything, least of all the topics that were extensively covered on pages 9 & 11 of this extensive thread.

- Mr Smith

Smithy, yes the graph covers owner-occupiers. Isn’t that who you are concerned about?

What the rba says is that whilst the build up of household debt is portrayed as being
driven by young couples buying their first house, in fact its mainly being driven
by older, richer people who are trading up etc.

Your flaw it seems, is doing what many do. You are trying to extrapolate what
has happenend in your little old heritage suburb as what is happening everywhere
and that is simply not the case.

Yes house prices have risen, but they have risen a lot more in some areas, particularly
yuppy targeted areas closer to the CBD, then out in the battler suburbs, where new
land is still being developed. (like Cranbourne in Melbourne for instance)

Of course there is no way that young first home buyers can compete with double
income high earning yuppies in their 40-60s ! Duh.

Mind you, it seems to me that even in battler suburbs, in NSW prices have risen
faster then in other states. 10 years ago, the Carr Govt was trying to come up with
ways to avoid urban sprawl, IIRC. Less land released, plus passing on quite
significant infrastructure costs per block to developers, would have the effect
of increasing the cost of those new houses.

Despite all this, new houses built in NSW, at 245m2 are still the largest in Australia
and are 53% larger then 20 years ago, so those new home buyers can’t be doing
it that tough.

http://www.abs.gov.au/AUSSTATS/ABS@.NSF/Previousproducts/1301.0Feature%20Article262005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view=

Renovations in your area might be minimal, but in other areas they are huge. A lot
of those 3 by 1 fibros have been dozed and replaced with modern homes. In areas
with more land per home then your suburb, pools, spas, have gone in. Rooms get
added, upgrades are done, as people know that it increases the value of their
homes and they can sell if they wish, making a tax free profit. That’s a better
investment then a bank deposit, where inflation and tax eat up the lot.

Yab again,

Yes Graph 9 only refers to owner-occupiers (overall) so:

A. As the RBA document says:
"If comparable figures on debt associated with investment properties and margin loans were available, they would almost certainly further skew this distribution of debt" and:

B. It needs to read in context with Graphs 8 & 10 (plus text) to see that (once again) the debt-servicing burden for "people in the bottom half of the income distribution" has increased from around 20% in 1996 to 30% currently.

No I'm not just concerned with owner-occupiers specifically but this entire topic & all of its implications.

As for your saying:
“What the rba says is that whilst the build up of household debt is portrayed as being driven by young couples buying their first house, in fact its mainly being driven by older, richer people who are trading up etc”

Yeah I know – because I told you! (Jesus H!)

Right there on page 15 of this thread
just after the post where you were saying that older people were more cautious about borrowing & a new generation were living large, driving up the debt on easy credit & low interest rates (check it & see).

Then you continue to push this idea that speculators aren’t driving the bubble, that its owner-occupiers investing in their houses to make so-called “profits”.

Once again – the only way they can make a “profit” is by trading-down to a cheaper home & pocketing the difference.
Yet on the same page you acknowledge that the phenomenal household debt level is “being driven by older, richer people who are trading up etc.”

So if you read your own script you’d see that among the owner-occupiers in that age/wealth category the ones that are trading-down to gain an advantage are not in the ascendancy.

More commonly they are borrowing heavily to trade-up.
Well – who would’ve thought? So the RBA’s remarkable revelation puts another convenient misconception to the sword.

continues.

continued from above..

As I said on page 15 “That doesn’t imply that mortgage stress isn’t a problem for the 1st homebuyer. It confirms the degree to which wealthier households are using a greater debt-servicing capacity to advantage..”

But its not just owner-occupiers is it? Owners-occupiers don’t make capital gains, landlords do & they haven't driven the speculative boom, speculators have.
The owner-occupiers are passengers in that dynamic.

The key fundamental in property prices is rental return, that’s where the property market’s equivalent of a price/earnings ratio lies.
When prices are far higher than justified by rental values, when home-ownership is declining, some of us here are going to be far more interested in the things that have fuelled the bubble &
distorted the market than we are in bloody Cranbourne.

And a pointless remark like:
“Of course there is no way that young first home buyers can compete with double income high earning yuppies in their 40-60s ! Duh.”

Beyond being like Groundhog Day infinitely recurring - Does nothing to address the fact that prospective first-homebuyers would now pay up to 8.5 times annual income for a median-priced home when people in their 40’s –60’s paid half that or less.

And the point about my “little old heritage suburb” is that it has virtually no McMansions or gross add-ons & those things have nothing at all to do with the prices here or in many other places.

McMansions (cultural factors aside) are largely a result of building costs being cheaper relative to land prices. But it is often very low-spec, low quality building. They are super-sized junk – hence the term, McMansion.

“Your flaw it seems” (one of them) is that you have tried to make out that McMansions and extensions are making homes less affordable and yet those things are less common in “areas closer to the CBD” where the most expensive homes are.
In those areas (& elsewhere) the homes are the mostly the same size, same old assets – merely overvalued.

-MrSmith

Yabby wrote: "If the housing bubble bursts, so be it, houses will be cheaper."

I find this to be typical of your callous indifference to the plight of others.

This glib statement disregards the fact that there is a political imperative to maintain the astronomical current housing values so that those who were duped into buying homes at hyper-inflated prices would not lose the values of their assets.

If land speculators and property developers had not seized the political agenda decades ago, then Governments would have taken prudent measures to have avoided these current circumstances having come about in the first place, instead of rejoicing in them as one particularly loathsome former Prime Minister did as recently as 2004.

In fact, I myself was one such person caught in such a way. In the late 1980's my then partner and myself, believing that housing prices were only going to go on rising borrowed heavily to buy a flimsy run down shack.

Immediately after the market slumped and we were left paying high repayment for many year afterwards.

Thank you Mr Smith for your tenacity and perseverance.

Some other OLO posters clearly act on the assumption (as did a certain former Australian Prime Minister as well as a certain Propaganda Minister from Germany in the 1930's) that a lie repeated often enough can come to be regarded as the truth.

As I myself have complained before, this repetition bloats the size of these forums and degrades their worth. It's a shame that a rule to prevent such abuse of OLO could not easily be devised and enforced.

One suggestion would be to have a voting facility. Against each post could be a link to a form where other users could express approval or disapproval for the post. If a sufficient threshold of OLO users express severe disapproval of a particular post, it could be moved from the forum and place on an another location, say within http://waffle.onlineopinion.com.au and only a link to the at post would remain in the forum itself.

Thus, as an example, I would expect Yabby's most recent post at:

http://forum.onlineopinion.com.au/thread.asp?article=6697#101608

... would be very quickly moved to:

http://waffle.onlineopinion.com.au/thread.asp?article=6697#101608

This forum would be rapidly cleaned to largely consist only of posts which actually add to the value of this discussion. It would amount to censorship as those who are truly curious could still follow the links, but those of us, who already know what to expect from a post by the likes of Yabby would know not to bother.

Smithy, your continued confusion continues, because as you stated earlier,
you think that owner occupier homes were “ a household expense, a consumer
item.” or similar to a wedding ring.

I can assure you that a great many homeowners don’t see things that way, that’s
one reason why they keep ploughing money into their houses. If they thought
that all these investments were consumed, as happens to consumer items, they
would not be doing it.

If you (as in anyone) were to fall off the proverbial perch tomorrow and their
little heritage home in Yuppyville was worth a million or two, those kids who
inherit all that would not see it as a past consumable either, but would rent
out or cash in for top Dollar.

Houses are assets like anything else. I know of homeowners right now, who
have cashed in their overvalued Yuppyville houses and bought a thousand
acres of land with a house thrown in, as they see farmland as undervalued.
Have they traded down? Nope, they have simply traded what they consider
an overvalued asset for what they consider an undervalued one. The rising
price of grain which will affect the price of farmland, might well prove them
correct.

Given that rents often cover less then half of interest payments on a house,
let alone rates, land tax, insurance, repairs,etc investors are clearly fulfilling
a role by providing capital for those who choose to rent, relying on the
chance that they one day might make some capital gain. They are choosing
to take a risk, if house prices decrease, why should I be concerned?

My contention is that in your little heritage suburb, most likely full of
cashed up yuppies from the finanacial and similar industries, ( look
at the growth in that sector in Sydney), people investing in their own
uptraded homes have had a far larger effect then the investors which
you want to blame.

Yup, with so much cheap money and people investing in their homes,
the median house price has increased, but there is still cheaper housing
available for first home buyers,

Col Rouge's housing investment model with "15+" variables seems to include everything but "location, location". Does it account for the effects of tax policy on prices, rents, interest rates, and "capital" growth rates? Mathematical models, however sophisticated, are only as good as the assumptions on which they are based.

Col then wrote: "Small government and strong individual reliance always produces better societal outcomes than big, meddlesome and interfering government and weakened individual reliance, in every area of human endeavour."

Hear, hear. What a pity that Col's investment strategy relies on increases in the value of one's land due to OTHER people's efforts, and on BIG-GOVERNMENT tax policies that give favourable treatment to parasitic gains while penalizing the fruits of labour.

As a Georgist, I am more than willing to have my small-government credentials compared with those of any right-wing libertarian. See e.g. http://grputland.com/talking/privacy.htm , http://grputland.com/subs/ipart.htm#transparency , http://grputland.com/subs/ipart.htm#compliance .

If I were redesigning the tax system from scratch, I would have a system in which the government would not demand any information for tax purposes unless it needed the same information for other purposes. Of the taxes favoured by right-wing libertarians, the only one that passes this test is the odious poll tax.

And in case you're wondering, I have never used any hallucinogenic substances!

Concerning "daggett" and free markets: The problem with so-called free markets is that some of them are not free. A free market requires freedom of production and freedom of consumption. But for certain commodities, notably including LAND, there is no production and consequently no freedom of production.

In denying that there is a housing affordability problem, Pericles wrote: "For every sale there is a purchase. If houses are unaffordable, how come people are affording them every day of the week?"

The overwhelming majority of people who are "affording them" are already property owners and are therefore able to cash in and/or borrow against CAPITAL GAINS. First-time buyers don't have this luxury. To make matters worse, the capital gains are inflated by tax policies that pump up the values of existing homes instead of encouraging new construction.

Yabby wrote: "Less land released, plus passing on quite significant infrastructure costs per block to developers, would have the effect of increasing the cost of those new houses."

It should be noted that the provision of infrastructure to residential lots increases the values of those lots whether the developers pay an "infrastructure levy" or not. Such a levy, by itself, cannot increase the prices of lots unless it exceeds the increase in value due to the infrastructure (in which case it will delay sales until prices rise sufficiently to cover the levy). This outcome is easily prevented by setting the levy at a fraction (less than 100%) of the uplift in the site value since the site was last transferred, less any expenses incurred in contributing to the uplift (e.g. infrastructure provided by developers between developed lots). I have long argued that infrastructure levies should be modified in this way (see e.g. http://grputland.com/working/paper04.htm#solution).

Daggett,

You are perfectly correct in saying that:

“there is a political imperative to maintain the astronomical current housing values so that those who were duped into buying homes at hyper-inflated prices would not lose the values of their assets”.

and that:

“Governments (should) have taken prudent measures to have avoided these current circumstances having come about in the first place.

I believe that over time there will be a shift in the imperative due to disillusion with the current excesses & certain demographic changes but it will probably be a long & bitter grind. There are inherent obstacles to change & the best solutions would need time to take effect. Sudden & severe measures no matter how tempting would probably be counter-productive.

It’s tricky but it has to be done.

It was quite interesting how the “loathsome former Prime Minister “ quietly backed away from his “doubling the wealth of Australians” line as 2007 approached.
As for bubbles bursting, the downside of ‘market correction’ always tends to hit the least fortunate hardest. The American pattern of negative equity & home repossession has already taken hold & multiplied in parts of western Sydney.

As much as Yabby (& similar posters) can be disruptively repetitious I’m not sure if there is anything one can do about it. Your voting-down idea might have some unintended negative potential.

Hello grputland

Pericles observation was merely a semantic misconstruction of the word 'affordable'.

I prefer Sophocles.

I’m not exactly sure what brought about your “hallucinogenic substances” comment but it was quite funny.

- Mr Smith

Yabby,

I fully accept the idea that some people:

“have simply traded what they consider an overvalued asset for what they consider an undervalued one”.

I think the term ‘trading-down’ merely refers to a price differential it is not a value judgement as such.

Regarding the rest of that post (eg.):

“people investing in their own uptraded homes have had a far larger effect then the investors which you want to blame.
Yup, with so much cheap money and people investing in their homes, the median house price has increased”

The idea that a speculative housing-bubble can be driven by (busily renovating) owner-occupiers is intriguingly strange, possibly original.

Having finally identified your position however, I shall simply accept that you are determined to maintain it even though it still appears to have one or two irreconcilable aspects:

1. As previously mentioned you have acknowledged the RBA’s finding that household debt
“is mainly being driven by older, higher-income households that are trading up to higher quality or better located houses, buying investment properties and taking out margin loans to buy shares”.
(RBA quote)

Yet you maintain that people who are putting their savings into renovations (to then maximise the advantage of trading-down) are somehow more significant.

2. You have acknowledged & discussed various aspects of the housing bubble.
Here’s how Forbes Magazine’s Investopedia.com defines it:

“Housing Bubble
A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts.”

http://www.investopedia.com/terms/h/housing_bubble.asp

Anyhow, its your theory, your entitled.

I’m out.

Mr Smith

*In the late 1980's my then partner and
myself, believing that housing prices were only going to go on rising borrowed heavily to buy a
flimsy run down shack.*

One could excuse Daggett here, for making a bad investment decision in the
1980s, people were less informed in those days, not so today. All of us
who remember the 18% interest rates, have been screaming from the rooftops,
for people to not overcommit themselves, or they could get burned. TV,
the papers, the internet, politicians etc have all warned the public.

http://www.news.com.au/business/money/story/0,25479,22769113-5014088,00.html

Clearly many people ignore these warnings and even lie to obtain even more
credit. According to the article its millions of them. If people refuse to take notice
and refuse to help themselves, they can only blame themselves, not the Govt.

Once again, those who believe in the nanny state and Govt control of everything,
call for yet more controls. Nothing changes. Yet if housing and share prices
now drop say 20% and interest rates rise a bit, everyone will learn really fast
that all those warnings and attempts to limit peoples borrowings, were there
for a good reason. Sadly a bit of pain often teaches people far more then
lots of rules and regulations

Grputland “Col Rouge's housing investment model . . . seems to include everything but "location, location". Does it account for the effects blah blah . . . are only as good as the assumptions on which they are based.”

“Location” is an integral consideration and included when assessing

A purchase price and differential State stamp duties
B anticipated capital growth

“Location” further influences maintenance costs, example, “seaviews” degrade more rapidly than inland property .

It does account for the effect of tax policy on prices. (inclusion of stamp duty), CGT calculations, income tax (that is why the investors marginal tax rate is an input)

“Capital Growth Rates” I said “The escalating sell price (annual % growth over time)”

I agree “Mathematical models, … good as the assumptions on which they are based”.

That is why I cast doubt on “climate models” which a variety of Al Gore and IPCC grant beneficiaries try to throw down our throats.

Basically, all the modelling of climate science is too young (infantile?) to have been tested against “actuality” for accuracy.

“Modelling” for property investment requires

A deep knowledge of accounting practices and tax laws
B developed skill for computer modelling
C understanding of the dynamics of house values in the Australian market.
(whilst many of the drivers to price are common across nations, matters of tax, land scarcity and building codes are parochial.)

For much of the past 20 years, I made most of my income by developing models to satisfy the commercial expectations of my clients plus speculative applications which I package, market and sell commercially.

I can reasonably lay claim to A, B and C.

“parasitic gains while penalizing the fruits of labour”

All are free to take a risk.

“negative gearing” actually means “buying a future capital gain from current pre-tax income”

Investment capital growth, versus net holding costs and tax position determines if it is “viable investment” or not.

“redesigning the tax system”

I don’t “know enough” to “design a tax system from scratch”, you don’t either.

And we don’t have the luxury of a “green field site”

Smithy, you misrepresent my claims. Nowhere did I state that home renovation
was “the” driver of a speculative housing bubble, merely one of a number of
ways in which people invest in housing. So your strawman argument won’t
work, sorry.

If you recheck my Tuesday post, you’ll see that I used the same word as the reserve bank, i.e. “uptrading”.

My point remains, a great many people don’t simply see their houses as a
consumer item or household expense, similar to a wedding ring, as you claim,
but in fact as their major investment. They are happy to uptrade, renovate,
and improve their houses in ways that add value. That mass of owner-occupiers
all doing the same, would have a far larger effect on the price of houses,
then so called speculators.

My other point remains that since our economy has changed, away from
manufacturing, more into services, such as financial services, etc, many of
those high income yuppies who work in those industries, are also prepared
to buy real estate closer to where they work, i.e. the CBD. That along with
peak oil fear and the convenience factor, as wealth increases, means that
those so called yuppy suburbs such as yours, have risen in price, far more
then the battler suburbs.

Yup, something like 1 in 5 people have invested in a second property,
we’ve been encouraged to do that, rather then rely on Govt for old age
pensions. Given no incentive at all to invest in bank deposits, people
don’t. Australians are notoriously bad savers, but then Govt policy carries
its share of responsibility for that. Perhaps if Govt did not tax the inflationary
part of bank deposit returns, we might be less reliant on overseas capital,
to finance our financial system. That would also make things more
equitable. Everyone ploughing money into self housing, as any profits are
tax free, has certainly not helped to prevent a housing bubble.

Yabby, your last paragraph essentially sums up what I've been saying all along - that government tax policy has had a big impact on housing affordability, by encouraging those with the money to do to pour their money into buying up the housing stock. Because very few are putting their money into NEW housing developments, this has the inevitable effect of leaving less housing available for those without so much money - i.e. the first home buyers.

It's by no means the only thing driving up housing prices, but if you accept that government policy is partly behind it, then I'm not sure why you seem to jump on those of us that suggest better policy is needed to help reverse the trend for supposedly wanting a "nanny state" to look after us - which simply isn't the case at all. OTOH, I certainly object to your effective claim that there's no affordability crisis, because anyone can afford a perfectly nice run-down shack in some outlying suburb as long as they don't mind spending a few more hours in the car every day. Today's generation have every reason to expect a higher standard of living than you did at their age, just as yours was far better than those from 30 or 60 years earlier. And a standard of living that requires being located 40 or 50 kms from jobs, families and friends doesn't give a lot of time for actually living.

Wiz, I think one of Yabby's underlying messages is to stop being so city-centric!! If you buy a house in an outer suburb, dont take ajob in the CBD. Living an hour from rellies is in my opinion a good thing - they dont just turn up unannounced that way. This is a big country with lots of opportunities for people willing to think outside the square. If you are determined to be one of the sheep then no amount of barking at your heels is going to help you.

Yabby, many of these yuppie finance professionals could easily work from home 90% of the time - I do. I work for an employer that located more than 500kms from where I live. It requires a bit of travelling, usually around 6 times a year for 1-2 weeks, but its quite do-able. So I dont buy the location location argument or that its too far to drive to work every day. Work from home and save on some fuel!!

If negative gearing were to be removed from property investors, we should even up the playing field a bit by also removing capital gains tax from the houses/units when sold. That way the investors will be in exactly the same position as owner/occupiers, which is pretty fair. If I have time to run a few figures on this, I will and see whether we would be better or worse off. I have a feeling that it would be worse off, given that there are a large number of positively-geared properties held (negative gearing gets a lot of hype, but I dont see it that often).

Admittedly, when Col Rouge says that:

“negative gearing” actually means “buying a future capital gain from current pre-tax income”
He is technically correct.

I quite like that definition because it illustrates a point being that:
First-home buyers don’t have that privilege.
First-home buyers are buying a dwelling from after-tax (net) income, with no prospect of an actual capital gain.

That needless to say, gives the investor a huge advantage against others competing in the same market. It quite clearly discriminates against the first-home buyer.

The fact that first-home buyers aren’t given the opportunity of offsetting their costs against tax barely begins to indicate the degree of disadvantage that they currently incur in this country.

Not that I would suggest that they are allowed that opportunity. By increasing their purchasing power in a competitive market it would simply add to demand pressures & end up being passed on as higher prices leaving them no better-off & the property market more inflated.

Which is exactly what it does in the case of property investors. Except that it does leave them better-off by giving them an advantage over other buyers & allowing them the prospect of a capital gain while the tax-office covers the costs.

The costs in this case are price of the property, interest repayments, rates, maintenance etc. minus the rental return. Normally the rental return would be the key fundamental determining the price an investor is willing to pay. Where the rental return is low relative to the price (or vice-versa) the costs are greater.
The other key factor is the expectation of a capital gain.

Negative gearing enables some investors to pay a higher price by allowing them to offset rental-income losses against tax on other income. In this way it can distort the market by encouraging prices that are higher than would be justified by rental return.

Negative gearing predates the current surge in house prices which began in Sydney & took-off exponentially after the 50% capital gains tax discount was introduced in late 1999 when interest rates were particularly low.

continues

Country Gal, you are quite correct, many people can and do work from home,
IT etc will assist in increasing that. A lot of tree changers do exactly that.
But there are still one hell of a lot of jobs, where people have to rock up
to work every day.

If you take a city like Sydney, the growth in yuppy jobs has just been
enormous. For instance, just look at the growth of Maquarie Bank in
the last 10 years. Then they had just floated on the ASX, now they employ
something like 11’000 people, a fair few of those in Sydney. That’s just one
company!

Its also very true, that rising numbers of Aussies are becoming very city
centric. ( I call it the rats in a cage effect) :) They want everything
convenient and within walking distance if possible and will pay big
money to achieve that. Lots of them feel strangely uncomfortable,
if they ever head out to the bush. They become quite nervous in such
unfamiliar territory. City life is all that they know, like the rats in their
cages.

Wiz, your generation already has far more opportunities the we did,
but its up to you to take them and make them happen. Society does
not owe you life on a plate. Some of you will thrive and some will
fail, that’s really up to you. Opportunities abound like never before.

Yes Govt policy does affect people and their behaviour, but the carrot
usually works a lot better then your big stick approach. This is the
problem with Govts, they think that they can predict how people
will behave and usually get it wrong. People just dodge the stick
in extremely creative ways and the unintended consequences are
often far worse then the problem was in the first place.

AFAIK Keating did some experiments with negative gearing. The
result was less investment in the housing industry, so nobody built
any. So rents skyrocketed. It’s the octopus effect. Those many tentacles
will behave in ways that govt beaurocrats have not even dreamed of!

Mr Smith

To correct your statement re discrimination

“First-home buyers are buying a dwelling from after-tax (net) income, with no prospect of an actual capital gain.”

I would note

An investor benefits from a capital gain upon disposal, assuming the sell price exceeds the buy price + costs. However, he incurs capital gain tax liability accordingly.

If that investor had been an owner-occupier the capital gain would have been the same however, there would be no capital gains tax liability (something which effectively, under your definitions would “discriminate” against the investor).

I would note first home buyers have the same opportunity to purchase multiple homes, provided they are prepared to accept the market risks.

My ex-wife presently owns two investment properties, one our old matrimonial home plus another which she has owned for some 10 years, since she bought a new property recently. She does not earn a massive income but managed to buy the investment property in a market which was open to everyone else.

My elder daughter signed up for a mortgage on her first O/O property at aged 21.
Now aged 27, she told me she is ready to buy an investment home, I told her exactly what I said about current income used to purchase a future capital gain. Her view, she had just received a promotion at work and sizable pay increase and could afford to cover the current negative gearing costs.

So if a divorced woman, earning a very modest income (I doubt she even benefited much from NG tax deductibility) and a single younger lady can see the potential and handle the risks of buying investment properties, why should they not benefit from their chosen form of saving?

I would further note, the negative gearing loss is generated from the costs of ownership of the investment property exceeding the income earned.

Thus the tenant is being “subsidised” by the investor for their occupancy of the investment property.

This is the real hurdle to FT Buyers, the immediate extra cash outlay between renting and buying because no investor is there to subsidise their tenancy.

Yabby wrote, "One could excuse Daggett here, for making a bad investment decision in the 1980s, ..."

Firstly, I didn't make the post in order to be judged as an 'investor'. I was only attempting to obtain a secure roof over my head, the provision of which I consider should be a basic human right.

As I have already made clear, I consider property investment to be essentially about deriving one's income at someone else's expense. I would prefer to earn my living in other ways.

My point is essentially that ordinary people get burnt whether housing prices rise, or suddenly drop.

For Yabby, that's OK, if they lose out. He would have us think that it's all their own fault for not knowing as much as he does about the pitfalls of the property market, or for not being prepared to commute 3 4 or more hours per day and pay for the necessary petrol.

He shows no concern for the sheer desperation and fear of housing insecurity which drives many to gamble recklessly, and to lie, in order to obtain the necessary loan to purchase a house.

All of this was entirely unnecessary. As I have pointed out many times on OLO, the housing Trust of South Australia for years made good quality housing available to all levels of South Australian society and never cost the taxpayer a cent.

The example of the HTSA confirms absolutely that Australians could do very well without the private property market. By having run down the public housing sector since the 1950's when Menzies began the process of privatising it, Australian governments were only doing the bidding of the private property sector to the detriment of the rest of society.

---

Another excellent resource is Sheila Newman's 2002 masters thesis "The Growth Lobby and its Absence" (2.6M pdf, 248 pages+notes,index,TOC,etc) It is downloadable from http://candobetter.org/sheila

It contrasts Australia and France. Australia has a sizable growth lobby which derives it income by unsustainably constantly increasing population in order to drive up the value of their investments, which is not the case in France.

Who said anything about a "big stick" approach? All I've suggested is to reduce the size of the carrot available for those who invest in existing properties, and increase it for those who invest in new property developments, or invest elsewhere. If previous trials at modifying negative gearing didn't work, then try something different. I don't expect to see any legislation outlawing particular behaviour, nor would I envisage any net increase in government revenue.

If either you or Country Gal think that you'll ever be able to tempt a significant fraction of young first-home buyers out into regional areas, then good luck to you. Though I have to say, if there was a huge rush of 20 somethings towards your favourite little country town, you mightn't entirely be happy with the result. Young people do have different desires and motivations to their elders, for all sorts of reasons. To desire to be within a reasonable distance of regular destinations is eminently sensible - the benefits of reduced car dependence are considerable.

Our generation may have more opportunities, but some opportunities are far more worthwhile than others. Trading the opportunity to own a decent house in a decent location for the opportunities to own countless electronic gizmos and jetset to exotic holiday locations doesn't seem such a great deal to me. Further, there are only so many careers that one can be truly passionate about: I consider myself extremely fortunate that I happen to enjoy a job that pays very well. My youngest sister (7 years junior) has passions that are unlikely to ever equate to a truly well-paying job (though she gave up pursuing teaching because that paid even less!), and has accepted that she'll probably never be able to afford her own home, and moves about between rental properties and Mum's house on a fairly regular basis. She doesn't complain about it at all, but there really is no good reason why someone of her intelligence and determination shouldn't be able to do well enough in life to be able to afford a place to call her own.

Yeah-Right !!

- That AFIAK(?) Keating line is a complete lie, a really old, well-worn professional lie.
______________

(Smith continued-from-previous-post...)

While negative-gearing allows for rental losses to be offset against tax, the 50%CGT discount increases net gains. Henceforth the greater investor incentive has been in seeking in short-term capital gains rather than a profitable long-term rental investment.

Earlier this year: “ANZ chief economist, Saul Eslake said landlords managed to make profits on their property investments until 2000 when the federal government introduced a 50 per cent discount on capital gains tax”
(‘Tax Office reveals $4bn cost of negative gearing’ Financial Review 20/4/07)

The well-worn idea that negative-gearing increases the supply of rental properties - is remarkable only for the fact that it almost entirely preposterous.

It is very difficult to reconcile this notion with the tax office’s largest-ever negative gearing loss & a record-low vacancy rate both occurring in the same year – last year.

A tax concession can only increase supply in so far as it contributes to investment in new construction.
As previously mentioned, you can’t increase the supply of housing without building more houses.
In ownership terms there are only tenancies & owner occupied homes. Increased investment in existing homes merely redistributes ownership among the existing stock. It decreases the rate of home ownership.

_________________________

(For comic relief)

Country Gal

says:

“If negative gearing were to be removed from property investors, we should even up the playing field a bit by also removing capital gains tax from the houses/units when sold”

So, in return for giving up a tax rort that no-one else in the market receives anyway, millionaire speculators that produce nothing can live long & prosper tax-free.
How very productive! It sends a great message to tax-payers that actually work for a living.

Country Gal continues:

“That way the investors will be in exactly the same position as owner/occupiers, which is pretty fair”.

Except that owner/occupiers don’t make capital gains. They use the proceeds of their sale to buy their next home (as seen on p,11 of this thread)

(Groundhog day again)

-MrSmith

Col Rouge says negatively-geared landlords subsidize their tenants.

Now that really takes the cake. If the rent paid by the tenant is meeting (say) 60% of the landlord's cost of holding the property, why shouldn't the tenant get 60% of the capital gain?

Is it because the landlord needs compensation for the risk of a capital loss? No, because if the tenant got 60% of the capital gain, he/she would also bear 60% of the risk of a capital loss and would therefore, by the same logic, be entitled to 60% of the capital gain as compensation.

Is it because the tenant gets the benefit of occupancy? No, because an owner-occupant gets both the benefit of occupancy and the capital gain. It might be said that the owner-occupant needs the capital gain in order to avoid higher mortgage repayments on the next home. But by the same logic, the tenant needs the interest on 60% of the capital gain to cover the higher rent on the next home. If you are an owner-occupant, it is in your capacity as occupant (TENANT) that you need somewhere to live and "need" your capital gain in order to pay for it. But an absentee landlord, by definition, already has somewhere else to live and therefore doesn't have the same "need".

The property investment industry as a dirty big secret: tenants subsidize the capital gains of landlords.

This has implications for the rights and wrongs of bankruptcy. Most individuals who go bankrupt have been tenants for some of their lives, and in that capacity have been defrauded of more than enough capital gains to pay their debts. Yet bankruptcy is treated as a sign of moral turpitude on the part of the debtor -- so much so that the debtor is temporarily barred from standing for Parliament. That the landlord who pocketed the capital gain tends to be among the "wronged" creditors adds insult to injury.

Wiz, denying investors a legitimate business expense, but expecting them to
pay taxes on profits, is surely a big stick approach. The drop in CGT was
introduced to compensate for the removal of indexing, which Smithy
conveniently forgets. A Dollar invested 10 years ago, has lost a large %
of its value through inflation. People need to be compensated, or they won’t
bother saving in the first place. That’s exactly why we have such a low
savings rate in Australia and borrow so much from overseas.

Building new homes is linked to the price of established homes and to
rents. People will do it, if its worthwhile. At the moment rents are simply
too low to justify it.

You are quite negative about your sister’s potential to own a house one
day. If she shares with a partner and they bank one wage, live off the other,
you’ll be amazed how fast they can accumulate capital. She stands to inherit
one day, our generation can’t take it with us. Just a couple of solutions,
there are many more. Stop expecting life on a plate and there are solutions,
just as we had to find them.

Daggett, State labour Govts are free to build welfare housing, Homewest
still does. They own 39’000 houses. They also help people buy their
own homes, with shared equity.

http://www.keystart.com.au/key/home.htm

http://www.dhw.wa.gov.au/404.asp

If investment was not your concern and your house value dropped, why
were you concerned? You still had the same house to live in, as a
“consumable” as Smithy calls it. Clearly houses are an investment, he
just denies it.

Yes, people are obliged to inform themselves about decisions they make
in life. If they don’t, there is a price to pay. The nanny state cannot protect
them from themselves and their own stupidity. That’s how our society
functions. If you get pissed and prang your car, don’t blame society.
The same applies to other aspects of life. There is no shortage of information
out there these days, especially with the internet. Our society gives people
huge freedoms to choose, so chooser beware.

Yabby asked "If investment was not your concern and your house value dropped, why were you concerned?"

You seem completely lacking in imagination and unable to work anything out for yourself when it is convenient not to. Everything has to be explained to you down to the finest point of detail.

If the value of my house had dropped and the values of all houses had also dropped and remained low, that would have been fine. I would have been burnt once, and once only, by having paid too much initially for my house. However, our partnership ended and we were forced to sell when the market was down. By the time you factor in all the stamp duties, estate agent's fees, conveyancing fees, bank fees etc, we had lost tens of thousands. Of course since then housing prices have escalated once more.

---

Obviously state Labor governments 'can' build 'welfare' housing, but they choose not to because they are captives of property developers and land speculators. The Housing Trust of South Australia, as I already pointed out, and you have pretended not to have noticed, catered for all levels of South Australian Society and not just desperately poor. It did not cost taxpayers a cent.

If publicly owned housing can provide for everybody without us being forced to pay to support armies of landlords, property speculators, real estate agents, mortgage brokers, etc, then it is clear that we would all be a lot better off without the private property market.

Yabby I haven't stated anywhere what I believe the correct adjustments to current government policy are - the only outcome I'm interested in is seeing housing become mode affordable for first home buyers. That may well include lowering stamp duty and/or any taxes that work against housing developers, to offset any reduction of benefits to speculators in existing stock. I've no idea where you get the idea that rents are LOW from - it was you telling me a few weeks a go that high rents were proof that the main problem was a lack of housing stock!

BTW, re negative gearing: http://www.smh.com.au/articles/2003/08/24/1061663676588.html

As far my sister's potential to own a home - you're probably right, once our parents pass on, there should be some inheritance money to go around. Given my parents are both 60, and both have family backgrounds of longevity, that should be in about 25 years, by which time she'll be over 50. Now it's true I said she's accepted she'll "never" be able to afford her home, so I suppose in 25 years' time is better than "never".

And as I said before, saving enough for a deposit is not the issue - it's the fact that mortgage payments for even very basic houses in the sort of areas she wants to live (mostly "working-class" suburbs) are already greater than her monthly wage, and her partner earns even less, having only just graduated from uni. So sure, she could always dump him and pick a partner based purely on his ability to afford a mortgage. I'll be sure to recommend that to her when I see her next.

The current situation is unsustainable there is a big gap between affordable rents and sustainable rental returns.

If a 2 bedroom unit sells for $320,000 then for a reasonable return the rent should be $325 per week. A 3 bedroom house that sells for $650,000 should be rented for $650 per week.

If a tenant is earning an average wage of $58,000 they have a gross income of just over $1000 per week and a disposable income of $800 per week. Tenants are in rental stress if more than a third of their income is spent on rent.

In inner suburbs with high demand for rental accommodation the 3 bedroom house rents for $425 to $500 per week and the 2 bedroom unit rents for $260 per week.

Over the past 50 years landlords have made money from capital gains on their property. Landlords run the gauntlet of low income tenants who default on and part pay their rents for a variety of reasons.

I have absolutely no problem with decent low income housing being provided by state owned Housing Trusts because private landlords with 1 to 3 properties can't afford to deal with low income tenants facing housing stress.

Grputland “Now that really takes the cake.”

As Marie Antoinette said “Sarcasm never works for me.”

“If the rent paid by the tenant . . . .why shouldn't the tenant get 60% of the capital gain?”

If the landlord fell on hard times and sold the property at a loss, should the tenant pay the landlord 60% of the loss?

“No”

because “the tenant signed up for occupancy, not house price fluctuations.”

Re Giving the tenant 60% of the gain

Answer “the tenant signed up for occupancy, not house price fluctuations.”

The future taxable capital gain is a speculative benefit, not assured by time or practice.

If a tenant wished to participate in any future capital gain, he might but likely, only at the expense of increased cost of occupancy or by buying an investment himself.

No investor would sensibly forego additional benefit to a tenant unless the tenant was prepared to pay for it.

Otherwise the return on the investors investment would become sub-viable (relative to its “risk”, the return on investment housing would become inadequate and investors would look at alternative / "Competetive" options like shares or commercial property or futures markets etc.).

Re “tenants subsidize the capital gains of landlords.”

If a tenant pays less than cost (negative gearing tax loss for the investor), then the tenant is clearly being “subsidised” by the investor.

The benefit a tenant receives = some where to live.
The benefit an investor receives = someone paying rent.
All good contracts benefit both parties (Symbiosis). Otherwise one of them would not enter the agreement.

Billie “situation unsustainable”

All markets are infinitely sustainable, all that happens are the prices change with supply V demand.

Agree $325,000 house would generate a rental of about $325/week (5%pa rent return).

The tenant’s desirability to pay would find the value of the $650,000 downgraded to something less.

Re “private landlords with 1 to 3 properties can't afford to deal with low income tenants facing housing stress”

You are an observer. That choice / risk, only the private landlords can individually make / take themselves

Daggett, I simply see your situation from a different perspective then you do.
Had your life unfolded differently, the housing market would have worked
fine for you, you would now be a proud house owner, all paid for, ready
to leave it to the kids. What happens in your private life, cannot be blamed
on the market.

If WA can provide welfare housing, so can other states. Homeswest has
been around for a long time, through liberal and labour Govts.

Wiz, rents can be both low and high, depending on your perspective. Billie
made some good points.

I had a look at your favourite suburb, Blackburn. There are houses for rent
for around 350$ a week. Convert that to interest at 8%, it pays the interest
on 225k$. As an investor, why should I pay twice that and lose the difference
every week?

If your sister’s partner has only just graduated, you are jumping the gun
yet once again. The impatience of youth! Schoolteachers, which she
thinks are low paid, earn 50-60k a year in WA, more for higher up ones.
When they both earn that amount, they could rent a place, bank one
wage and in a few years save nearly enough to buy a unit outright.

With rising interest rates, overvalued houses and credit tightening up
globally, IMHO it would be quite foolish to commit to a house now.
Look what has happened to Rams and Centro, when they ignored the
fundamentals of the market!

A quote from your URL. Perhaps Ross got it wrong:

*The time to move against negative gearing will be when the
looming over-supply has finally caught up with the rental apartment market. When the boom has
busted, prices have collapsed, vacancy rates are way up and rents have fallen even further.*

Actually, Yabby, I do accept that from an investor’s perspective, rental rates for houses in many suburbs are quite low. This would seem to indicate that a lot of investors are relying on negative gearing for the income loss offset. If that offset wasn’t so generous, no doubt some of those investors would get out of the rental market and put their properties back on housing market, logically bringing down the price of houses. A simplification to be sure, but it’s hard to see how, say, modifying negative gearing so any shortfall between rental income and mortgage payments on existing properties was only 50% tax deductible could make the housing affordability situation worse. Of course you could argue the other potential outcome is rental rates going up, but from a renter’s perspective, rents are already quite high, and were they to go much higher, many renters would simply give up and move back in with their parents.

I don’t particularly have an opinion on Ross Gittin’s article, just felt it was worth presenting an alternative view on your claim that rolling back negative gearing would likely have unfavourable consequences.

My sister’s partner is also over 25 – I'm not sure the exact history, but he went back to uni to do second degree for various reasons. I can assure you that most starting school teacher positions in Victoria do not earn 50k a year (I actually couldn’t find any starting positions available on seek.com.au – bad time of year I suppose). FWIW, my other sister (who’s over 30) is in a similar position, despite having already saved up a sizeable deposit.

I agree that now isn’t perhaps the greatest time to buy, and I'm reasonably sure that within the next 10 years the housing price affordability crisis will eventually sort itself out, just not necessarily in a very nice way, and, unless some changes are made to government legislation, there’s every chance the same problem will reoccur in the future (though the changing demographics will inevitably make it less dramatic).

Wizofaus” If that offset wasn’t so generous, no doubt some of those investors would get out of the rental market and put their properties back on housing market, logically bringing down the price of houses.”

That is what would happen. However, such a move would reduce the availability of rental properties and not all renters would qualify or choose to be owner occupiers. For those folk, faced with a significant reduction of available rental housing and presumably an smaller reduction of rental tenants, the rental rates achievable by investors would escalate.

I would note, there is nothing “generous” about the negative gearing attributes applicable to housing. The rules for treatment income of expenses as they pertain to a housing investment are identical to investing in shares, futures markets or running a business.

Indeed, I have seen where significant “negative gearing” opportunities exist for those who “borrow” to buy shares, the rent is replaced by dividend and the capital gain can be a lot higher than from housing. Unfortunately, “risk” as it applies to the volatility of shares is far higher than housing and I have seen some folk go seriously broke in the process, losing their Owner occupier property as well as the shares.

Keating tried to fiddle with the tax laws of property investment negative gearing in the 1980’s.

The outcome was a reduction in the availability of rental properties as investors “fled” the market which, in turn supported a rent rate increase for the remaining investors to offset the loss of tax deductibility. In short, supply and demand, fewer rental properties at higher than before rental rates.

What you are doing is creating a once off opportunity for those wishing and able to buy today, at the expense of current investors and future tenants. Such manipulations, whilst seeming so “reasonable and egalitarian” often have hidden consequences which come up to bite one on the bum..

Yabby,

By way of explanation re. my comment about Keating’s negative gearing 'experiment'. The “Complete Lie” isn’t yours - it belongs to the property lobby in 1985-87.

While we may differ re. views & opinions that one was professional disinformation

The current vacancy-rate is lower(lowest-ever) Current ATO neg.gearing-payout is highest-ever.

I’ll-clarify-later (Word-Count) sorry.


_________________________________________________________

Col Rouge,

As regards your observation:

“the negative gearing loss is generated from the costs of ownership of the investment property exceeding the income earned.
Thus the tenant is being “subsidised” by the investor for their occupancy of the investment property.
This is the real hurdle to FT Buyers, the immediate extra cash outlay between renting and buying because no investor is there to subsidise their tenancy.”

With respect, (as I have previously noted) the only way that a landlord can subsidise a tenant is by charging a rent that is below market value.

As you will no doubt already appreciate in a competitive market, ‘market value’ is a price that is as high as the market will bear.
As investors generally seek to maximise their returns, landlords will almost invariably charge a competitive rent that compares well with similar tenancies & no less.

Some landlords have never benefited from negative gearing. Their tenants as such cannot possibly have been “subsidised” by this tax concession. In any case they all tend to charge the same market-value rents as anyone else.

Normally, rental values limit prices. An excessive price relative to “the income earned” increases “the costs of ownership”. A high enough price will render the investment unprofitable as a rental property.

A tax concession that allows some investors to offset rental income losses diminishes the price-inhibiting influence of rental values and distorts the normal balance of the market.

In an economy where tenants are paying market value rents, investor tax concessions that add to demand pressures & render loss-making tenancies viable are “subsidising” inflated prices (vendors) not tenants.

The extent of the “the immediate extra cash outlay between renting and buying”
is an indicator of the degree to which properties are overvalued.

Continues,,,

Col Rouge twice triumphantly declares that "the tenant signed up for occupancy, not house price fluctuations."

Yep. In other words, the tenant signed up to subsidize the landlord's capital gain.

Col continues: "No investor would sensibly forego [sic] additional benefit to a tenant unless the tenant was prepared to pay for it."

Correction: No investor would concede part of the capital gain to a tenant unless the tenant paid for it OR the initial purchase price were lower, or some combination thereof.

I think the lowering of the purchase price would be the dominant effect, because the prospect of sharing in the capital gain would not of itself constitute a cash flow from which rent could be paid, while banks would be hesitant to lend against such "collateral", especially to tenants.

But that's academic, because my intention is not to promote a capital-gain-sharing scheme as a preferred policy, but merely to debunk the ridiculous proposition that the party who gets the unearned capital gain is subsidizing the party who doesn't. (Notice that Col left capital gains out of his "symbiosis" analysis.)

In his next post, Col dredges up the old anecdote about the Hawke/Keating government quarantining negative gearing in July 1985, allegedly causing rents to rise. He conveniently fails to tell us that negative gearing was not merely confined to new construction, but disallowed altogether. He also fails to tell us that the reinstatement of negative gearing in July 1987 (not merely for new construction, but across the board) gave us a residential and commercial property bubble, which popped in 1989, precipitating the Recession We Had To Have (1990-91), of which the most obvious symptoms peaked in 1992 or 1993 (unemployment being a lagging indicator of recession).

(Smith-continued from prev. post)

Col Rouge.

With regard to negative gearing, the problem that I find with your observation that first-home buyers and other people of modest income:
“have the same opportunity to purchase multiple homes” is threefold:

You would no doubt be aware that negative-gearing is most effective for individuals with incomes that attract the highest marginal rate of tax - the richer you are the greater the advantage.
Conversely, the relative disadvantage applies not only to first-home buyers but investors of lesser means.

More importantly though, while the investment property market may be “open to everyone” as you say – not everyone can be a property investor, for the simple reason that if most people were landlords there wouldn’t be enough tenants to go around.
Seriously, if say, 60% of people owned investment properties the inevitable tenant shortage might adversely affect property values.

It is in this respect that the property market differs greatly from finance markets for example, where most people, either directly (or through superannuation) can participate.
As it is residential tenancies require tenants who remain tenants until they become first-homebuyers.
The relative number of owner/occupiers (the rate of home-ownership) either increases as more first-homebuyers enter the market or decreases as the level of investment rises.
The rate of home-ownership determines the balance in this interdependent relationship. Investors, tenants, and homeowners all play a necessary role.

Which is why I am opposed to a tax policy that discriminates in favour of investors and disadvantages other competitors in the housing market.

Furthermore this relationship cannot be directly compared with other investment markets where all the competitors are investors.

I do not accept the idea that owner-occupiers enjoy tax-free capital gains for the simple reason that owner-occupiers don’t make capital gains.
They use the proceeds from the sale of their one & only property to buy their next home. The value of that property rises and falls in parallel with comparable homes in the same market.

That is why financial commentators (conservative ones included) often refer to the rise in owner-occupier property values as “illusory wealth”.

-MrSmith

So few words, so many things to say!

Firstly Wiz, I AM a 20-something, as are most of my friends. I bought my first house at 24. Most of my friends of the same age are very similar, buying first homes by the age of 25. I dont consider myself to be that superior in intelligence, so if I can do it, why the heck cant most others?

"I consider property investment to be essentially about deriving one's income at someone else's expense". Daggert, it costs to have a roof over your head. You either pay rent, or you own it. It has generally cost considerably more to own it. Property investors would not have a market if the price of renting was not considerably below the price of ownership.

Cutting taxes and other costs on new property for developers would not result in more housing, or cheaper housing. The biggest concern is land supply, AND distance from the CBD (which has been stated over and over by sheep to scared to wander from the mob). The supply of new homes would be roughly the same, AND the price would be the same (the market is currently prepared to pay it, so developers - the true millionaires - would pocket the difference).

Smithy, we are never going to agree. At some stage owner/occupiers take their capital gain. They might do it with intent, looking for opportunity to trade-up, they might do it when moving location, they might do it when the family has grown up and they choose to downsize. Groundhog day (arguably the dumbest movie I ever started to watch) is going to continue - I understand what you are saying, but I dont agree with it.your logic would be ok, but it ignores the complexities of the property market, and assumes that all property values rise or fall at the same rate. It also ignores that fact that there are sometimes sellers in a hurry to offload who will drop their price in order to do so (thereby creating opportunity for someone else). Eg I got my new house for around 80% of its normal value, because I was prepared to take on a problem that other people were not. With a bit of work and the gain from my previous property, I would make an immediate gain of around 50%, even with prices remaining static. Actually I could spend $40,000 and still only have paid normal market value for the condition it was in prior to any work being done. But I spent 2 years looking for an opportunity, as I do see housing as an investment, like any other. I can now choose to spend my $40,000+ and live in a really nice 3-bedder, or spend it, sell and have enough extra to buy a fairly new 4-bedder (if not build exactly what I want). Of course if everyone tried to do this, then the opportunities wouldnt be there. But they are not prepared to put in the time and effort (into making tax-free dollars work for you), so that's my good luck and reward for making the extra effort.

Wiz, I think quite a few people invest in the housing market, as it’s the only
way they know to protect their savings from inflation. They can physically
see their investment, they don’t understand or trust the share market. Bank deposits
are not an option, as they are not compensated for inflation loss. I think that’s
a really bad mistake in Australian tax policy, no wonder we borrow so much
from overseas.

My problem with your theory is that when I listen to developers like Harry
Triganoff ( can’t remember the spelling lol ) and similar, they rely on investors
to drive their building of units etc. When investors go away, these guys stop building
and investors don’t invest, where they think there is no capital gain to be had in
the longer term. So if established houses drop in value, why bother to build
new ones ? IMHO you’d get less accommodation built and rents increasing,
but yes, a few people would get a cheaper house. That’s a short term solution.

If more people saved money, the cost of capital would reduce, but they won’t
save whilst they are being screwed by inflation and not compensated by the
tax system. Better off to just spend it and live it up!

Here is what WA teachers get paid. We are trying to steal your teachers :)

http://www.det.wa.edu.au/teachingwa/ccm/navigation/returning-teachers/attractive-salary-options/

Some good news. Rudd has seen the light and reached an agreement with
our premier in WA. The economy here grew by 7% last year, they can’t even
find staff to make cups of coffee here ! So more 457 workers are going to come
here to WA where we need them, perhaps less to Melbourne and Sydney. That
should take some pressure off your housing market too. The last Govt refused
to acknowledge the problem. I guess we were just their little cash cow.

Perhaps your sisters should just see the light and move to West Australia :)

Yabby wrote: "... The economy here grew by 7% last year, they can’t even find staff to make cups of coffee here ! So more 457 workers are going to come here to WA where we need them, perhaps less to Melbourne and Sydney. ..."

I see that Yabby is, in this thread, mindlessly revelling in the unsustainable economic growth which he acknowledges elsewhere is threatening the future for our children.

How does he sleep at night?

Yabby wrote in response to "Why the Ruddslide" at http://forum.onlineopinion.com.au/thread.asp?article=6685#100333

"So you think that South Americans, Arabs, Venezuelans, Nigerians, etc, won’t be burning more oil, as their wealth increases? Think again. You can save all you like, they will burn it faster then you can save it."

Who knows Yabby?

Maybe they are all just as selfish and uncaring as you are, but please don't assume that they are in order to excuse your own greedy selfishness.

Yabbby (responding to Wizofaus) wrote:

“The drop in CGT was introduced to compensate for the removal of indexing, which Smithy conveniently forgets”

No, I hadn’t entirely forgotten but thanks for reminding me.
In order to qualify for the 50% CGT discount the investment has to be held for 1 year or more.
Thankfully, the prospect of 50% inflation in 1 year is remote
The newer rule encourages a faster turnover & better suits short-term speculation than long-term management of the asset.
Perhaps they should’ve stuck with indexing.

He goes onto say that:

“Building new homes is linked to the price of established homes and to
rents. People will do it, if its worthwhile. At the moment rents are simply
too low to justify it”

?

Due to record-low vacancy rates, rents in fact are quite high & have risen at a much higher rate than the CPI (as the press have kept telling us).
So if that isn't high enough to make it worthwhile it would appear that the problem lies elsewhere

There’s another problem with the idea that building new homes isn’t “worthwhile” due to allegedly low rents
Being that rents would also be relatively “low” in the market for established homes.
There is no reason to assume that rental values have a disproportionate affect on new constructions compared to other properties or that extraordinarily high rents are a prerequisite to construction activity.
This hasn’t been the case in previous decades nor should it be now.

In any case the idea that investors aren’t finding it “worthwhile” seems like a good reason to make it worth their while by reserving tax privileges for investment in new construction.

This proposal needn’t directly affect current arrangements.
It would apply to future investments
It’d certainly encourage supply. If we are going have investor-friendly tax incentives then they might as well reward the productive.

-MrSmith

P.S. Regarding Yab’s observation :

“Keating did some experiments with negative gearing. The
result was less investment in the housing industry, so nobody built
any.”

The abovementioned proposal would ensure that they did.

continues…

continued…

Which reminds me -

That old story about how Keating’s “negative-gearing” experiment drove everyone out of the market in the mid-eighties .

Admittedly (with hindsight) a similar policy could’ve been better conceived & implemented.
Nonetheless what really drove them out of the market as much as anything was a highly effective media fear campaign on the part of the Housing Industry Assoc. & other property lobbyists.
Investors were selling-up before the policy was fully devised & some of them weren’t even in a position to take advantage of negative gearing anyway (eg. pensioners with investment properties).

This whole drama was part of what became a long-running tussle between the Hawke / Keating govt. & the HIA who were openly supporting the Liberal Party.
Their motive was in discrediting the govt. as well as protecting the tax-concession.

As is often the case with rumours & scares in investment markets the perception was equal to or greater than the actual event.
Either way the policy was withdrawn well before the real impact could have been assessed

The property lobby has gone on to refer to this debacle as evidence in support of negative gearing every time the topic is raised.
They’ve never explained why it doesn’t seem to be necessary in other countries.

2007 nonetheless, is the year that fallacy was finally laid to rest.

(Once again) this year:

Rental vacancies fell to their lowest recorded level - just over 1% - less in some places & much lower than the mid-eighties.

While the Tax Office recorded its largest-ever negative gearing payout (over $4 billion)

Anyone that can reconcile those two facts with the idea that negative gearing increases the supply of rental properties has more imagination than honesty.

One of the ironies of our system is that as rents are included in the CPI - putting pressure on the inflation measure that the Reserve Bank uses to set interest rates.
Thus one affordability problem reinforces another.

Investors that benefit from negative gearing can offset the cost of their interest repayments against tax on other income.

- Mr Smith

Grputland “Yep. In other words, the tenant signed up to subsidize the landlord's capital gain.”

The tenant is free to pick and choose, motivated by his own self interest.

The tenant agreed to rent for a rate which would cost a lot more if he were to be say, buying it.

The interests of the landlord is not a motivator of the tenant. Cheaper accommodation is.

“debunk the ridiculous proposition that the party who gets the unearned capital gain”

The period at the commencement of purchase by the investor, when costs exceed income, represents the time when the investors income subsidizes the purchase of the property (negative gearing).

You fail in debunking anything.

You are merely espousing emotional claptrap in support of an agenda which seeks to take from those who exercise work ethic, thrift and prudence (saving disposable income) and depriving them of their rightful reward. Then using those expropriated savings to subsidize the irresponsible excesses of the self-indulgent and profligate.

Re “residential and commercial property bubble, which popped in 1989, precipitating the Recession We Had To Have (1990-91)”

The property bubble of 1989 was the result of the flight of capital from the share market which crashed by 20% in 1987, not the reinstatement of NG.

The “recession we had to have” was nothing to do with any deflation in property values but the fallout from extended socialist governmental incompetence.

You are re-writing history to suit your theory, I am pleased you are not my doctor because I can easily de-bunk your diagnosis.

MrSmith “illusory wealth”

There a lot of cars and things being purchased with “illusory wealth”, so if Ford and Holden are prepared to accept the bucks, they cannot be that “illusory”

The point with first time buyers and folk of modest means, they are at the start of the ownership cycle. Ten years down the track, they will be in the same position as others, to invest if they so wish. I have said to others the first year of ownership is a huge adjustment, after that it gets easier every year.

Yabby/Country Gal, I don't doubt that if my sisters were happy to live in the countryside or Western Australia, they would be able to afford houses. Neither of them have any desire to do so, for any number of reasons. But it's simply not reasonable to state that housing is affordable as long as you are prepared to uproot yourself and give up your existing lifestyle. Given that choice, most are going to remain as renters.

Yabby, the housing market will always attract investors - there's no question about that. It's a matter of ensuring that the competition between first home buyers and moneyed investors is a reasonable one - currently it isn't.

And you are correct - the tax system doesn't hugely encourage people to save, especially when there are high levels of inflation. I hope something is done about this too.

Col, read the link to the Ross Gittin's article I posted - there is at least some debate over the degree towards which Keating's attempted changes to negative gearing affected the rental market.
And further, how you can claim Keating's government was socialist is beyond me - Howard was far more socialist in his welfare to families and home buyers (which, because it only just became available as we were first buying, helped us - but has only made it worse for subsequent buyers).

Smithy, at the end of the day, negative gearing is still about spending a dollar
to save 50c short term, hoping for a capital gain one day. What 2007 showed
is that investors aren’t silly. Given low prospects for capital gain in all but
yuppy suburbs, why take the risk of building a new house and renting it out?
Much easier to just dump that money into the super fund, as people did by the
Billions.

According to your little theory, established house prices would drop as investors
charged to build new ones, to obtain the negative gearing benefits. But of course
that would also mean that new homes, once established, would lose value, so
where would be the capital gain? So why bother to invest in the first place?
Better to look at other options to reduce tax, such as super.

The hedge funds call all this the black swan problem. Just because many have
never seen a black swan in the northern hemisphere, does not mean that they
do not exist. When they do appear, they can bite you in the bum, as many
hedge funds have discovered, when all their modelling failed.

http://business.smh.com.au/no-escape-from-the-subprime-meltdown/20071221-1iix.html?page=fullpage#contentSwap2

I remind you that Ross Gittins thought we would be swamped with new homes,
unable to find tenants. How wrong he was, just 4 years ago.

Wiz, your sisters can live wherever they want. But as areas closer to the
CBD are being swamped with evermore rich yuppies, they will have to compete
with them for housing and renting. To live there will cost extra, as we have both
rising population and more rich yuppies. It’s their choice really.

Daggett, I sleep perfectly well at night, for I have long ago realised that its pointless
to stress oneself over the things that cannot be changed. If you do, you are the
loser, the world will keep spinning with or without you.

Nobody has argued more forcefully then I have, that every woman on this planet
should have access to family planning, many would have less kids if given the
choice

On Dec.20, Col Rouge wrote concerning negative gearing: "Thus the tenant is being `subsidised' by the investor for their occupancy of the investment property."

On Dec.22 he wrote: "The period at the commencement of purchase by the investor, when costs exceed income, represents the time when the investors income subsidizes the purchase of the property (negative gearing)."

Eh? At face value, this seems to imply that investors subsidize themselves. But in case it is meant to maintain the original claim that investors subsidize tenants, note that a tenant initially pays PART of the investor's cost of holding the property but gets none of the capital gain, whereas later, when the landlord's repayments are lower, the tenant pays MORE than the cost of holding the property but still gets none of the capital gain. Who's subsidizing whom?

Col then reveals his self-serving prejudices by accusing me of "using those expropriated savings to subsidize the irresponsible excesses of the self-indulgent and profligate."

Oh. So tenants are irresponsible, self-indulgent and profligate, and that's why they're tenants. Nothing to do with the fact that the Reserve Bank deliberately sets interest rates so as to maintain the so-called NATURAL RATE OF UNEMPLOYMENT, which is the minimum unemployment rate that applies enough downward pressure on wages to give stable inflation. Nothing to do with the fact that workers who are consequently unemployed or precariously employed have trouble getting housing loans. Nothing to do with the fact that when wage relativities are widening, those at the bottom of the wage scale have trouble competing in the housing market.

The high-unemployment policy is hidden by casualizing the workforce and classifying everyone who has worked one hour in the last week as employed. This is how the former government could boast of "record low unemployment" while using HIGH unemployment as a Damoclean sword over the heads of workers.

CONTINUED...

...CONTINUED

I do not deny -- indeed some of my writings affirm -- that the land bubble of 1989 was partly driven by flight of money from the stock market. But the reinstatement of negative gearing also helped. In the absence of negative gearing, there would have been a flight to investments that yield current income, not just capital gains. Bubbles, by definition, are inflated by the quest for capital gains.

Col attributes the "recession we had to have" to "extended socialist governmental incompetence". As the government in question floated the dollar, deregulated the banks, introduced dividend imputation, and continued the dismantlement of protectionism, its incompetence was clearly not of the socialist variety.

Then he accuses me of re-writing history to suit my theory, when he has just done the same to suit his theory. Accusing your opponent of using the very tactic that you are using is of course a standard propaganda technique.

Thanks, grputland.

I am inclined to agree that it was not 'socialist incompetence' that we endured in Keating's time. It seemed to me also that it was the rich, rather than workers, whose needs the Keating Government was attending to.

Your point about unemployment is interesting. Whilst unemployment is understated, it still seems to me that unemployment is historically low at the moment, but only due to unsustainable resources and real estate booms.

Yabby, I'll accept that in some suburbs, the house price can be attributed to the 'rich yuppy' or more likely the 'rich empty-nester wanting the city lifestyle' effect (seeing as there can't realistically be that many more rich yuppies than 6 years' ago).
However I don't believe these are the ones under discussion. Find me some proof that suburbs in Melbourne such as Glenroy, Coburg or Preston have significantly changed in their demographics in the last 6 or 7 years (that is the period that has seen most of these suburbs go from being affordable to out of the question for many first home buyers). I also question just how many "rich yuppies" and "city-lifestyle empty-nesters" really would want the sort of fixer-upper's that dominate the bottom end of the market, which is still out of the reach of many young couples looking for their first home.
Obviously what I also want to see are figures showing the ratio of renters to owner-occupiers. If that ratio hasn't changed in the last 6 years either, then it would be unfair to put the house price rise down to a flood of investors. However I would say that if there is evidence that the demographics have changed - say, the average owner occupier in those suburbs is 5 years' older than they were 6 or 7 years ago, then this could just as well be a *consequence* of the housing bubble, as those are now the only people who can afford to own houses in those suburbs, having been themselves pushed out from more desirable suburbs.

Yabby (pretending not to understand my earlier point) wrote:

"If WA can provide welfare housing, so can other states. ..."

This avoids confronting my earlier point with a statement of the obvious. Here is my point again:

"... the housing Trust of South Australia for years made
good quality housing available to all levels of South
Australian society and never cost the taxpayer a cent."
(http://forum.onlineopinion.com.au/thread.asp?article=6697#101896)

What this clearly shows is that the South Australian economy functioned perfectly well for decades without its residents being obliged to hand over vast amounts of their wealth to an unproductive layer of land speculators, landlords, real estate agents, lenders, mortgage brokers, etc.

---

Yabby wrote,

"... I have long ago realised that its pointless to stress oneself over the things that cannot be changed."

You are liar or a fool if you claim to know for a fact that 'things' cannot be changed..

In fact, I think it suits you perfectly for things not to change. You probably imagine that when TSHTF you can use your ill-gotten wealth to shield yourself from the worst effects of environmental calamity that you are now helping to bring about.

If this were not the case, you would at least be more honest about a few things.

You would not repeatedly attempt to prettify the quarry that WA has become as an "export based, globally focussed economy".

You would at least acknowledge the ecological costs in your repeated rants about the wonders of economic growth in WA.

You would not pretend to know for a fact that "South Americans, Arabs, Venezuelans, Nigerians, etc" are uncaring enough to necessarily want to undermine our own efforts to save the planet (see again Yabby's post in "Why the Ruddslide" discussion at http://forum.onlineopinion.com.au/thread.asp?article=6685#100333).

In fact, the selfish uncaring greed you attribute to others is your own.

And you would not spend so much time attempting to disparage those of use who care enough to at least give it a try.

So, don't attempt to shirk your own moral responsibility for the harm that you know you are helping to bring about.

Ok Wiz, I looked up the first one, Glenroy. The median house price has gone
From 260k to 327k in 5 years, or up about 5% a year. Affordability hasn’t really
changed much, except that now interest rates are higher.

But to understand the housing bigger picture, look at the economics bigger picture,
going back some years. Victoria was a disaster under Kirner and Kennet had to
make some tough decisions and swung things back on track. At that stage people
were leaving Melbourne, heading for Queensland. In the last 6 years, your economic
prospects have improved, so have Australia’s as a whole. Low interest rates,
a healthy economy, money from the share market etc, means people can save a bit
and invest. Yup, lots have bought another house, I gather about 1 in 5 people own
a second house. What’s so wrong with people saving a bit for their old age?
Perhaps other forms of savings should be encouraged, with tax advantages.

Look at cashed up expats moving back, they buy expensive houses. So do many
migrants. With Melbourne growing at 4%, all these things together have meant
a strong housing market. But with the global money situation and us borrowing
so much from overseas as we don’t save enough in cash, I’d say the market
could be in trouble this year.

Daggett, with 2 posts a day, I try and concentrate on what matters most. You and
I have quite different philosophies. You want a nanny state, think that Castro’s
housing etc is wonderful. I prefer to make my own decisions and keep Govt
interference to as little as possible. The private housing market has worked
just fine for most people including me, I built my own over a couple
of years and then finished it over the next 10.

Yes the people in various countries will use more oil as their wealth increases.
Where haven’t they?

Yes Australia needs WA ‘s resources-boom, or the Chinese, Arabs and others
with huge cash reserves will own more and more of our country. We need
to pay our bills.

Yabby wrote:

"... with 2 posts a day, I try and concentrate on what matters most."

No, you don't.

You attempt to bury, under an avalanche of your repetitive, largely irrelevant twaddle, carefully argued posts by others who have shown that they care about others, the environment and future generations. In doing so, you repeatedly ignore facts and logic which don't conform to your own miserable outlook on life.

The only outstanding question for me is: Why do you do it?

Don't you have a life?

Or is your own stake in preserving the current atrocious status quo, so great that it is worth all this time and effort to confuse the simple truth contained in the article and many contributions to this discussion? Or is someone else paying you to do this?

Yabby wrote: "You want a nanny state, think that Castro's housing etc is wonderful. I prefer to make my own decisions. blah, blah, rant, rave ..."

Now, stick to the point. Let me try one more to time to get you to respond to two clear points I have made in previous posts:

1. Yabby, you have already asserted several times that no matter what we try to do in this country it will necessarily be ruined by choices made by others in other countries, and I have disputed that assertion. Simply repeating that assertion, yet again, adds nothing to this discussion. The real point is that, whether we live in Australia, Venezuela, Nigeria, China or wherever, we all have choices before us.

In Australia, we could choose to end our unsustainable dependence upon the escalating levels of export of our finite endowment of mineral resources which is warming the atmosphere and poisoning the rest of the planet, whilst disfiguring our own country (see, for example, the scarring of the NSW rural landscape at http://lee.greens.org.au/index.php/content/view/1354/65/ http://lee.greens.org.au/index.php/content/view/1353/65/ http://lee.greens.org.au/index.php/content/view/1352/65/ http://lee.greens.org.au/index.php/content/view/1351/65/ http://lee.greens.org.au/index.php/content/view/1350/65/ http://lee.greens.org.au/index.php/content/view/1349/65/ http://lee.greens.org.au/index.php/content/view/1348/65/)

And we could choose to end our unsustainable dependence upon real estate and population growth which you, for your part, are bent upon increasing to a break-neck rate.

No one is pretending that this will (...tobecontinued)

A rise in median house price from 260k to 327k in 5 years, combined with a 2% interest rate rise, is more than enough to put most houses in Glenroy out of the reach of many first home buyers. I'm not really sure why you would believe otherwise - certainly incomes haven't risen anything like that much.

Yes, I accept there are a large number of factors that have contributed towards rising house prices - but many of those factors would apply in any country or city in the world, and yet Australia's most populous cities have some of the worst housing affordability anywhere in the world, so we need to be looking for factors that are unique to Australia.

No-one has said anything is "wrong" with saving for their own age - just that it's not reasonable to have cashed-up investors competing with first home buyers for the same housing stock.

Yabby you can't credibly comment on the state of the Victorian economy in 1992. You are not an economist or repository of business knowledge, you weren't in Victoria and your previous post was wrong. In Victoria people sometimes still say "I've had a Kennett of a day" and the previously most Liberal state in Australia did not vote for Howard, ever. If the rest of Australia followed Victoria's voting patterns Howard would never have been Prime Minister, and that's part of Kennett's legacy. Kennett closed schools, cheaply sold off hospitals, public transport, public road construction, ultilities and stopped building public housing.

Median house price in Glenroy is $375,000 that is still 6 times average gross earnings.
An investor would want to get a rent of $375 per week and that level of rental would put the tenant on average income into rental stress. Its Glenroy for G*d's sake so the likely tenant is dependent on welfare and this rent is beyond them.

The people who took up the mortgages capped at 17% in 1992 stayed on those mortgage rates for years after the other mortgage rates had dropped to 8%. Meanwhile their houses had dropped in value. In hindsight the sophisticated financial decision would have been to sell up and rent but if you struggled to raise a $20,000 deposit realising a $20,000 loss is very hard to do.

Careful reading of Col Rouge's posts indicates that his womenfolk have real estate portfolios but not our Col so perhaps the subtlety of my arguement just floats past him.

Have you noticed people on incomes over $200,000 often don't want to receive tax cuts if it means that public hospitals, schools and other social infrastructure has to be cut to pay for it. The people who aspire to earn the high incomes want the tax cuts.

Billie, my figure for the median house price in Glenroy, came from the REIV
website. As to Kennett, Keating etc, yes I know they were both unpopular.
But I also think that both understood what happens when Govts and
States get too far into debt and foreign financiers start to dictate the terms.
.Just take a look what happened to Argentina, when they went
over the limits. That is when REAL pain sets in! No I’m not an Economist,
but I subscribe to the Economist, in order to understand the global scene.

Wiz, yup a 2% increase in interest rates has in fact increased repayments
by around 25% or so, which is part of the problem. Our banks obtain about
half their funding from overseas. Why can’t Australians save more? We
have no incentive to do so, as I pointed out. Rudd has mentioned making
savings for a home tax free, that would help, but why not just make the
inflation component of interest payments tax free, then people would
find it worthwhile to save. Our interest rates are in fact higher then in
many other developed countries, because we don’t save much, look at
them blow it in the shopping malls right now.

Smart couples will both work and save a good chunk of one wage, that
way they soon have a substantial sum together for a hefty deposit. Then
they can think of kids etc. Smart couples did that in my time too.

Oops Daggett, sounds like you got out of the wrong side of bed today.

I’m discussing housing affordability, you want to change to coal mines.
Why not open a new thread? I think that blaming it all on speculators
is simplistic, there are many reasons making one large reason as to
why the housing market has behaved as it has. I know lots of ordinary
people who are helping their kids buy houses, or who plan to leave
one house to each kid, so have bought one and are paying it off.
These aren’t rich speculators, but plumbers, other tradesmen, etc.
They are all workers.

Yabby

Re your observation:

“Given low prospects for capital gain in all but
yuppy suburbs, why take the risk of building a new house and renting it out?
Much easier to just dump that money into the super fund, as people did by the
Billions”
According to your little theory, established house prices would drop as investors charged to build new ones, to obtain the negative gearing benefits. But of course that would also mean that new homes, once established, would lose value, so where would be the capital gain?”

this is either a genuine misinterpretation, a bit of a wind-up (or both).

My “little theory” is more of an assessment & it isn’t solely concerned with the current detail of investors’ motives & options

To begin with the housing construction industry isn’t entirely reliant on investors building houses then renting them out,

While some constructions are commissioned by owner/occupiers or investors, most homes are built by developers who sell them on to anyone willing to buy – the majority being people that move in & live there.

Developers’ interests are a little different to the speculators that simply buy & sell, Developers add-value. They are more concerned with profit in the broader sense than capital gain per se.
The gain that they make on the land purchase is enhanced by the construction. Although the price of land rises & falls, the profitability of the value-added has ensured that the construction sector has remained viable through most market conditions.

Housing supply doesn’t rely solely on investors. When the home-ownership rate is especially low they are all the more welcome to go & superannuate to their heart’s content.

The point of my “theory” as you put it is to eliminate discriminatory policies that create disproportionate demand pressures (& add nothing to production)
As well as making an exemption where invetment enhances supply
- broadly speaking that is, as a general, long-term, principle.

“Low prospect of a capital-gain”
– rather than being a permanent condition is another indicator of the degree to which properties are currently overvalued.

- Mr Smith

Wizofaus,

Re, your request

“Obviously what I also want to see are figures showing the ratio of renters to owner-occupiers. If that ratio hasn't changed in the last 6 years either, then it would be unfair to put the house price rise down to a flood of investors”

Isolated figures regarding increased investment & the declining proportion of first-home buyers are abundant & they all imply that the relative proportion of owner-occupiers has declined however if you want the actual ratio of owner-occupied homes / tenancies then you are looking for the rate of home-ownership.

Consider this:

“Reflecting Sydney’s high prices, Sydneysiders had the lowest level of home ownership in the country at 58 per cent”

(‘Home owners struggle to pay mortgage’ Financial Review 18/6/07)

That figure came from the “Genworth Financial Mortgage Trends Report”.

http://genworth.com.au/mortgageTrendsReport.htm

Genworth Financial are a mortgage insurer and the findings of this annual survey seem to be widely quoted throughout the financial press & industry sites.

They found that home-ownership rates in other capital cities varied between 60-68% or so.
According the ABS, the long-term average (nationwide) since the early 1960’s has been fairly consistent at just over 70% (or was).

The (definitive) ABS figures tend to be census-based & few years old. There is always a big time lag between house-price & ownership figures as the prices are immediately available whereas the other requires data across the entire population.

Even accounting for the margin of error between different sources of data the Sydney figure is the most interesting (to say the least) because the boom in property prices started much earlier so the cumulative effect over time is more apparent & because the prices here are higher.

The 58% figure is also significant because it is well below the 70% mark and getting within range of 50% - below which homeowners would become a minority for the first time since statistics became available in 1947.

There are other indicators One of them is the relative increase in investor housing loans.

(more details - later).

- Mr Smit

Grputland ”investors subsidize themselves.”

An investor must source the income to finance a negative geared investment from somewhere (lenders require the borrower/investor to prove it).
For most small investors that subsidy is from the disposable component of earned income, typically but not always, a ma and pa who both work and whose children are flying the nest, resulting in two pay packets, fewer mouths to feed and significant disposable income.

It is this source of disposable income which finances the loan which the investor uses to buy the property.

Hence, without the investor accepting a risk of future capital gains and funding that purchase by redirecting disposable income into the investment, there would be fewer rental properties for those seeking to rent.

I would note, not all folk who rent would want to buy. People working short contracts or seasonal work in particular areas may have property elsewhere and be seeking to rent near where they work. Migrants and foreign visitors may prefer to rent before committing. Divorcees may not be in a position to but whilst their own property in being resolved (I’ve been in the migrant and divorcee category).

Only a simpleton believes that all rental tenants actually want to buy.

A Reserve Bank conspiracy is as laughable as it is misguided.

Keating, you might be right, incompetence was maybe but a symptom. The twisted malevolence of Keating, is testimony to his “blind arrogance” which resulted in “messianic incompetence”.

Billie “not our Col so perhaps the subtlety of my arguement just floats past him.”

As subtle as a brick, Billie

The reason I am not holding investment real estate is part of a personal strategy which pays better returns.
Although, I presently have enough free cash resources with which to buy a house or two. Currently I want to see how this bunch of socialist meddlers jump before risking a hosing through the very sort of anti-negative gearing twaddle which this thread is becoming.

Changing tax laws for real-estate would make it a “special case”.

“Special case” is just a bad case dressed up to look half-way acceptable.

Yabby wrote: "Nobody has argued more forcefully then I have, that every woman on this planet should have access to family planning, many would have less kids if given the choice."

Is this the same Yabby speaking, who only in the previous paragraph wrote: "I have long ago realised that its pointless to stress oneself over the things that cannot be changed. If you do, you are the loser, the world will keep spinning with or without you."?

Presumably, then Yabby's 'forceful' argument for family planning has made a difference, otherwise he would not be 'stressing' himself "over things that cannot be changed", now would he?

So, perhaps he might care some time to explain precisely what difference he has made in this regard, or hopes to make.

Or, on the other hand, how can one treat as a serious advocate for population control a person who stridently advocates the maximum possible economic growth and the maximum possible immigration in order to make it happen?

Perhaps he has realised that paying lip service to family planning is a useful means to throw others off the trail.

If so, he would not be the first.

(continuedfromabove...) be an easy course to take embark upon, but we need to weigh up the choices rationally and not have the discussion sidelined by the hysteria and spin that you keep attempting to inject into the discussion.

(Yabby, if I appear to "have got out of the wrong side of the bed today", it may be as a result of your wanton abuse of this forum. As the "Why the Ruddslide?" thread has now been archived and as you yourself are in the habit of dragging red herrings across the trail, I think I am entitled this once to briefly stray off the formal topic here in order to conclude my point about your apparent willing participation in the destruction of our planet's ecology.)

So, Yabby, please leave aside your protestations that you are only going along with what cannot be changed and tell me what you yourself would like to see happen.

Do you prefer that Australia, along with the rest of the world, go on fuelling global climatic calamity, or would you prefer that we, together with the rest of the world begin to take steps to reduce the scale of activities that you yourself acknowledge are destructive?

2. That the Housing Trust of South Australia by providing decent affordable housing for all sectors of South Australian society at no cost to taxpayers is clear proof that our housing needs can be met far more cheaply without our dependence upon a private property market. That public housing has been largely abandoned (except for a few of the most desperately poor) is a result of Governments serving the interests of property speculators rather than the public.

The fact that very limited welfare public housing programs still exist which no longer meet the housing needs of all who require it as they once did, is completely beside the point.

Smithy, the article posted on OLO today, about the Swiss housing market, makes
for interesting reading. Renting is standard practise in many countries, with lots
of benefits, like flexibility to move when changing jobs. Perhaps we are a bit
obsessed with ownership.

I see a difference in this debate, between speculators and investors. Sure some
people would be trading, but given high stamp duty, selling charges, mortgage
set up fees etc for real estate transactions compared to the stock and commodity
markets, the latter would be far more attractive to speculators. Yes there are
lots of longer term real estate investors, but they include many mums and dads
who decide to buy a second home as security for their retirement and to leave to
the kids.

The present bubble no doubt was also influenced by so much cheap and easy
money around and people encouraged to borrow by banks and non bank sources.
The present US crisis will surely change that, plus perhaps some regulations are
needed to protect some people from themselves. Other options are making it
easier for first home owners to save up for their deposit, plus other incentives.

Disallowing a business expense for what is clearly a business expense, is a fair
old intrusion into good business practise. The fact that mum and dad investors
are buying houses, seems to me to be a good thing, not a bad thing.

Dagget-cacafonix, if I have any spare words on this thread I will gladly explain
my points of view, but they are not 3 lines answers, so you are free to start a
new thread and we can argue them point for point to your heart’s content.
The best you have done so far is to try and shoot the messenger, which won’t
get you anywhere. IMHO a course in anger management would not go
astray either :)

Fact is, the world is about to change, it is not about to stop. People will still
need nickel, iron, zinc, tungsten, gas etc. I am not a gloom and doom merchant
as you seem to be.

Col Rouge wrote that "without the investor accepting a risk of future capital gains and funding that purchase by redirecting disposable income into the investment, there would be fewer rental properties for those seeking to rent."

If that's supposed to mean that capital gains are a necessary incentive for investment, it is false. Buildings, vehicles and machinery all DEPRECIATE. Investment in such things is motivated solely by current income (realized or imputed). If the purchase price were low enough relative to the rent, current income would also be sufficient incentive to invest in housing.

Col continues to obscure the point that buy-to-let investors are not equally beneficent. Those who build new housing necessarily add to the stock available "to let". Those who merely buy existing housing take it either from other investors (a zero-sum game) or from prospective owner-occupants, at least some of whom are consequently thrown back onto the rental market, counteracting the investors' contribution to "supply".

Col writes: "I would note, not all folk who rent would want to buy."

All the more reason for ensuring that tax laws encourage the supply (i.e. CONSTRUCTION) of rental accommodation.

"Only a simpleton believes that all rental tenants actually want to buy," he adds. And who is this simpleton?

Presumably responding to me, Col writes: "A Reserve Bank conspiracy is as laughable as it is misguided." The conspiracy is not even a secret. Central banks routinely cite falling unemployment as a reason to raise interest rates. News reports of unexpectedly low unemployment numbers are routinely accompanied by commentary to the effect that it is bad news for interest rates. Central banks publish estimates of the "natural" or "inflation-safe" unemployment rate to guide monetary policy. Conservative employment policy is directed at reducing this "inflation-safe" rate by cutting wages (WorkChoices) or by exerting greater downward pressure on wages for a given unemployment rate ("mutual obligation"). Neither central bankers nor politicians have any intention of allowing unemployment to fall below the "inflation-safe" rate.

CONTINUED...

...CONTINUED

"Currently I want to see how this bunch of socialist meddlers jump before risking a hosing through the very sort of anti-negative gearing twaddle which this thread is becoming," says Col.

So is it "socialist" to require people to build housing before they can claim negative gearing? And does any sort of mutual obligation for negative gearers constitute "anti-negative gearing twaddle"? Build a house and you won't get hosed!

Reworking old ground, Col writes: "Changing tax laws for real-estate would make it a `special case'."

The tax laws per se would not make a special case of real estate if corresponding changes were made for other asset classes. Moreover, because access to real estate is a necessity of life, and because real estate includes land, which is immovable and fixed in supply, real estate is a special case whether the tax laws admit it or not. To pretend that real estate is just another asset class is to dress up speculation so that it looks half-way respectable.

For a change I'll pick on Yabby, who has just written: "Disallowing a business expense for what is clearly a business expense, is a fair old intrusion into good business practise."

For the purposes of public policy, what matters is whether the business practice is in the public interest. Profits made by creating wealth are more in the public interest than profits made by capturing wealth created by others. When rental accommodation is in short supply, building a house is more in the public interest than buying an existing one.

Grputland “Buildings, vehicles and machinery all DEPRECIATE.”

And so too investment properties, 2 ½ % pa for tax (commercial or residential).

Around 20% for vehicles and machinery between 33% and 10% pa, depending upon its expected useable life.

And they all attract depreciation allowance from the tax office.

Re “Investment in such things is motivated solely by current income”

Ignorant Rubbish.

Many commercial investments take years from raising capital to producing return. I have one which has taken 5 years thus far.

Investment in rental property is for longer than one year (=current income) if only because the capital gain tax would be treated adversely.

“And who is this simpleton?

Presumably responding to me,”

You should put a comma where you placed the question mark.

The role of the Reserve Bank is to regulate money supply, print/mint currency ensure deflationary / inflationary surges are stabilized and advise government.

We have "rules" for tax and commerce. All these things are obviously beyond your appreciation.

A profound ignorance to their purpose and process is a poor basis for criticism.

“The tax laws per se would not make a special case of real estate if corresponding changes were made for other asset classes.“

Equalizing out the impact of change. Also known as “rearranging the deckchairs on the Titanic”.

“real estate is a special case”

No, it is not.

“Real Estate” is no more “special” than food, petrol, electricity, telecommunications, banking or a national airline.

“Playing” with tax rates creates a once off surge in the market but does not change anything. After the dust settles, the same old problem of “supply and demand” remains.

As for “what matters is whether the business practice is in the public interest.”

I have always found that the “market” is the best indicator of “public interest”, not one individual, government appointed bureaucrat or massive Ego

A thesis on “Modeling of Horns and Enclosures for Loudspeakers,”

and degree in electrical engineering is deficient of any “fiscal” content or credentials but a Loudspeaker does suit you’re your Messianic Ego.

I will have fun with "ProsperAustralia.org.au" later.

Wizofaus,

As an act of goodwill to all men (& women) –yes all of them.

I won’t engage in arguments today I will offer the following urls (with sample quotes) as Xmas gifts.

- Mr Smith

I’ve been saving this one for a special occassion .

This is from the Executive Summary of the Reserve Bank's submission to the (2004) Productivity Commission Inquiry on First Home Ownership:

“10. The role of investors is particularly noteworthy in the current episode. For every new dollar lent for housing purposes, around 40 cents now goes to investors – a figure much higher than we have ever experienced before. The stock of credit outstanding is rising at nearly 20 per cent per year for owner-occupiers – an exceptionally rapid pace – but for investors the growth rate is closer to 30 per cent per year.”

“12. Thus, we find support for the view that investors have been contributing disproportionately to the increase in housing demand over recent years, with the effect that affordability, especially by first-home buyers, has been reduced.”
______________________________

The paragraphs are numbered 1-26, I recommend starting at 9 - read thru to the end, return to 1 & read again.

http://www.rba.gov.au/PublicationsAndResearch/SubmissionsToParliamentaryCommittees/productivity_commision_inquiry_on_first_home_ownership.html

So, how did the Productivity Comm. Respond?

“The Productivity Commission Inquiry Report into First Home Ownership was released in 2004, and waaaaaay back then, the report pleaded for a review "as soon as practicable" of "those aspects of the personal tax regime that may have recently contributed to excessive investment in rental housing”

http://blogs.theage.com.au/lifestyle/renovationnation/archives/2007/02/negative_gearin.html

Meanwhile in 2007..

June 21 - This self-serving survey blurs the lines between news & PR, nonetheless:

“the number of would-be investors has jumped by more than 75 per cent since the September 06 quarter”

Mums & dads:

“Higher income earners accounted for 57 per cent of all intending buyers.
The number of investors in the 'upper white-collar' sector increased to 504,000 ”

http://www.smh.com.au/articles/2007/06/16/1181414612357.html

___________________

Nov. 2nd

“In the year to September, lending to property investors in Western Australia soared 54 per cent to $10.1 billion”

http://www.theaustralian.news.com.au/story/0,20867,21064277-25658,00.html?from=public_rss

Compliments of the season

- Mr Smith

Thanks, Mr Smith.

Merry Christmas to you, too.

Here's a quote by Steve Keen in "A tale of two parties - and one bubble" in Dissent magazine (http://www.dissent.com.au, RRP AU$7.70, annual subscription $22.00) number 25 which only arrived yesterday:

"House prices have incerased by 250% over the term of the Howard Government, but mortgage debt has increased by more than 500%."

Smithy, I’ve read through your URLs and let me snip a quote from the RBA:

“an unusually strong desire by existing property owners for further exposure to residential property,
either in their own home, or in an investment property.”

I don’t see much talk of speculators anywhere, more like hundreds of thousands
of Australians, investing more in their own homes and buying an additional property if they can. This generation has been warned to provide for its own retirement,
many are listening and taking action. So 1 in 5 have bought second property.

You think these people aren’t mums and dads? Sure they are, empty nesters on
good salaries etc, lots of them. Personally I prefer this situation to that of the
60s and 70s, when only the very wealthy were able to own rental properties,
as the rest were unable to obtain finance.

Where we do have a problem is that so many people see few options to the
property market as a safe place to invest their assets, that’s why they are
prepared to accept such low rental yields, the rba talks of 2.5%. Personally
I prefer the advantages of well run industrial property trusts, given that
large companies prefer not to own property and they pay their rents on
time etc, capital gain to cover inflation still applies and no pesky tenants
to deal with.

But ok, many don’t, they might be enticed to use good returns from bank
deposits as a more trustworthy investment vehicle, if these were not
eaten away by inflation and tax. That’s why my comment about allowing
for inflation when taxing their returns.

The rba mentions the fact that Australia’s higher marginal rates of tax cut
in at a relatively low level. That encourages more and more people to
find ways to try and tuck some of that income away for the future, fair enough.

That’s not the main drain on the public purse, but the fact that something
like 27% of the population see the Govt as their main source of income.

Yabby wrote: "Dagget-cacafonix(sic), if I have any spare words on this thread..."

Perhaps if you desisted from repeating yourself or trying to lead the conversation off on stupid tangents, maybe you would find that you did have a few words to spare.

"...I will gladly explain my points of view, but they are not 3 lines answers,..."

If you would just stick to the point, I think you would find that a lot could be accomplished in 3 lines.

"...so you are free to start a new thread..."

I have made a number of points here, which directly relate to the forum topic or are responses to your own (often tangential) posts. You have so far failed to respond to them, if you have, have failed to respond honestly. It is up to you whether, from now on you, decide to respond adequately, wherever you choose to do so.

"...and we can argue them point for point to your heart's content."

If you do choose to start other forums, whether to promote your own bigotry against the Cuban alternative to laissez-faire capitalism (in which, BTW, 80% of Cubans own their own homes), your shallow pretence at being a population control advocate, or your monstrously immoral efforts to see that Australia's finite endowment of mineral wealth is dug up and exported as quickly as possible, I will respond to those posts.

Just please understand, I don't engage in these discussions for the fun of it. I engage in these discussions in order to counter the harmful misinformation that you and your kind are bent on propagating.

As far as I am concerned, these forums would be far better without your participation. Rather than arguing over whether land speculation is of any benefit to our society, which, to me, seems as silly as arguing over whether smoking does not cause lung cancer or the truth of the literal meaning of the Book of Genesis, I would prefer to engage in a discussion about how to excise the malignant cancer of land speculation from the body of Australian society.

(tobecontinued)

(continuedfromabove)

However, if you fail to respond adequately, I think other forum users will be entitled to conclude that you are avoiding making direct responses to my clear points in order to, instead, argue the details of less critical points where it is relatively easy for you to muddy the waters with repetition and by citing a few facts, which appear to support your viewpoint, in isolation.

---

Yabby wrote, "This generation has been warned to provide for its own retirement, many are listening and taking action."

Off we go on yet another tangent, courtesy of the person who complains of not having enough space.

Yes perhaps we were 'warned' to provide for our own retirement, but where were we given any choice in the matter or of how to provide for our own retirement? Whose choice was it to force us to hand over so much of our hard-earned money in commissions, management fees, exit fees, etc, to a previously miniscule and unproductive sector of our society, that is the superannuation funds?

What seeming idiot decided on our behalf to force the members of Australia's increasingly casualised work force to join a new superannuation fund, together with all of its overheads, every time they changed jobs?

In fact Labor's privatisation of Australia's retirement income was a policy which came directly from the murderous Chilean military junta, which came to power after overthrowing a democratically elected Social Democratic Government of Salvadore Allende.

It was overthrown with the help of the US government, because in the words of mad bomber Kissinger "The example of a successful elected Marxist government in Chile would surely have an impact on--and even a precedent value for--other parts of the world, especially in Italy." (cited in Naomi Klein "The Shock Doctrine"(2007) p451).

While Milton Friedman and other ideological compatriots of Yabby from the Chicago School of Economics, directed Pinochet's dismantling of Yabby's hated Chilean 'nanny state', by selling off publicly owned assets, dismantling social services and destroying protections of workers' wages, his army and secret police killed or imprisoned and tortured Chileans who opposed these policies.

Cheers Daggett.

Thanls for the Steve Keen url. I always have time for Prof. Keen. I wasn’t previously aware of this article so I am glad that you brought it to my attention.

Regarding my previous post, the complete quote from the last url, (in The Australan) read:
“much would depend upon how much Western Australia's market had been driven by speculators.
Investors have been flocking to the Perth property market, which gained 40 per cent in price last year and about 80 per cent over the past three years.
In the year to September, lending to property investors in Western Australia soared 54 per cent to $10.1 billion.”

This provides some insight into the motives & perspectives involved in this debate.

The term “flocking” in this quote refers to investors from the eastern states & other locations.
For those that are concerned about productive investment, debt & affordability, that flock could just as easily be characterised as a swarm of locusts that, having sapped the life out of Sydney & other markets has moved on to its next target.

From the well-established Perth landlord’s point of view that flock may as well be the flock of geese that laid the golden eggs, almost magically transforming the “value” of their passive investments.

One can easily see why some of those landlords may be disinclined to hear any criticism

- Mr Smith

Yab,

Re. your previous post

Some of us here are concerned with the interests of all Australians.
The fact that some of those in the highest income category may be manifestly fertile enough to qualify as “mums & dads” seems immaterial. Their parental status is no more worthy than anyone else’s.

The Reserve Bank submission’s comments regarding :
very low rental rates of return, capital gains & the property investment seminar industry are clear enough & barely begin to cover their observations on the topic of speculation.

You can’t rely on a keyword search at that level.

Which reminds me – a word to grputland, billie & various other contributors,
In case you missed it,

The Executive Summary of the Reserve Bank’s submission to
the (2004) Productivity Commission Inquiry on First Home Ownership

is ESSENTIAL READING for anyone interested in this topic (paragraphs 9-26 especially) essential & definitive.
Paragraph 13 for example:

“13. The dominant role played by investors in Australia in the current cycle is the result of interaction between:

* the desire of investors to earn capital gains from investing in rental property;

* the ease of obtaining finance to enter this activity; and

* the taxation treatment of investments in residential property.”

http://www.rba.gov.au/PublicationsAndResearch/SubmissionsToParliamentaryCommittees/productivity_commision_inquiry_on_first_home_ownership.html
________________

Yab,
Re. your comment vis-a-vis:

“I see a difference in this debate, between speculators and investors”.

So do I.

Regarding the interests of long-term landlords looking for a secure investment.
You are already aware (for example that) the OECD found that Australian residential property prices were 52% higher than justified by rental values.
Lower prices that are consistent with rental values better suit the interests of prospective long-term investors as well as first-home buyers & the broader economy.

- Mr Smith

Now, back to the cricket

Mr Smith,

If you were to e-mail Steve Keen at S-dot-Keen{AT}uws-dot-edu-dot-au, I am sure he would be happy to send you his regular newsletter.

His web pages are: http://www.debunkingeconomics.com http://www.debtdeflation.com/blogs

Smithy, to clear up one point, I am not a landlord, nor do I use negative gearing
to buy houses. I don’t even own a single house in Perth. But I know lots of
people who do, very normal, average people, who have worked hard all their lives.

Yes, property seminars attracted the true believers, like those flocking to religious
meetings or to the old pyramid marketing schemes. Promoters would try to flog
them apartments, then interest rates went up, some property markets down, they
learnt the hard way, as true believers do. In the present bubble market, chances
are high that the same thing will happen. My nephew in Perth actually gets to benefit
from all of this. He can rent a house for 200$ a week, split it with another tenant,
so rent costs him the grand total of 100$ a week, whilst he makes good money in
the mining industry.

Yes Perth prices have shot up, mainly in the yuppy suburbs, close to the CBD or
the beach. Perth has less of a shortage of land problem like Sydney has, more a lack
of tradesmen to build new homes, due to the booming economy. Perhaps we should
try and pinch a few more of those from Sydney :)

Daggett, unlike you, I post and discuss my philosophies purely for enjoyment.
If my posts get you so hot under the collar, why don’t you take the advice that
you gave others and ignore them.

My politics are very mainstream, a mix of both labour and liberal points of
view, depending on the issue. That’s similar to well over 90% of the Australian
public. Your extreme left wing political viewpoint was voted for by how
many of the Australian public? You are clearly a lonely fellow out there.

If the South Australian housing scheme was the answer to everything, why did
the voting South Australian public, not insist on its retention and turf out any
Govt that tried to remove it?

80% of Cubans have more what can be considered shacks rather then houses

80% of Cubans live in shacks? Where do you get that from? I gathered it was largely apartment blocks, pretty much all with electricty and running water. Though I certainly agree that a good percentage of them are in a condition that few Australians would be keen to live in.

Yabby,

As I wrote earlier, "... if you fail to respond adequately, I think other forum users will be entitled to conclude that you are avoiding making direct responses to my clear points ..."

---

Yabby wrote, "Unlike you, I post and discuss my philosophies purely for enjoyment."

Could you, perhaps, appreciate that some of us, such as OZZYRENTER from WA ("They're not really that poor" http://forum.onlineopinion.com.au/thread.asp?article=6576#98116), those single mothers I referred to above who only wanted "a place to call home" for Christmas or those hundreds of families "forced to live in their cars" on the Sunshine Coast, may not be able share in your enjoyment, even if they were all somehow able to get access to the Internet and join in?

I have no idea what your own personal stake in maintaining the grossly unjust, costly and inefficient privatised Australian housing system is, but I, nevertheless, believe you are consciously abusing your account on this forum in order to prevent others from learning the truth of it.

---

Yabby wrote, "My politics are very mainstream, a mix of both labour and liberal...".

Perhaps you would care to tell us exactly which 'labour' policies you support which did not originate from the Chicago School of Economics, and which were not first imposed on the people of South America by murderous military dictators(1)? Just because some past Labor leaders have, unforunately, embraced these extreme policies, does nott make these policies any less extreme.

It's easy to dismiss my own views as "extreme left wing", much harder to argue why they are wrong.

---

You clearly don't want to appear to have understood my earlier points. The reason that public housing programs such as the Housing Trust of South Australia were wound back was because the powerful private property interests have lobbied behind closed doors to bring this about. They were never wound back as a result of an open democratic consensus having been arrived at, and we are now reaping the terrible consequences.

---

1. As brilliantly chronicled in Naomi Klein's "The Shock Doctrine", 2007 http://www.naomikline.com/ShockDoctrine http://webdiary.com.au/cms/?q=node/2204 RRP AU$32.95

“consciously abusing your account on this forum”

Hehe Daggett, come on, get real! Just because I am a skeptic and refuse to swallow
every hard luck story that the press writes, you call that abusing this forum.

I actually checked up on some of those stories. The WA renter was upset that at
25 he could not afford to buy a house in one of Perth’s better suburbs. What’s
wrong with Armadale and similar, where houses are half the price? Lots of
young people buying houses in Perth Daggett, they just get off their butts and
help themselves. There will always
be whingers, who blame the world for their problems.

Then I checked on the girl who was going to lose her apartment. She didn’t want
to move further out, again where apartments were available, as the kids would
have to change schools, IIRC.. Umm so what? Kids change schools all the time,
that’s life. Yes I know that lots of people would like to live in the best spots
on the sunshine coast, all very nice. But what say if that doesn’t work out,
they move to where there is accommodation and jobs.

I see the opposite end of this story, every day battlers who don’t whinge and
complain, but get on with life and make the best of what they have. Australia
is full of opportunities and anyone can grab them. That is what market economies
create, opportunities for those who want to have a go.

In the early 90s I employed a 17 year old farm girl as one of the staff here, fresh
out of school. Whilst the other girls blew their wages on clothes, cds, expensive
make up etc, she saved what she could and grabbed any overtime available.

At that stage experienced investors like Kerry Packer were selling Westpac
shares for around the 3$ mark. Next thing I found out that this kid was buying
every share that her paycheck and savings could afford for around 3$ a piece.
She landed up with many thousands. Go and see what they are worth now!

We have been told that:

“There will always
be whingers, who blame the world for their problems”

And yet -

There will always be “whingers” that whinge about other
whingers who blame the world is full of whingers that whinge
- ad infinitum.
______________________________________

Cacofonix,

Thanks for the info. & the url, I will definitely use it.

- Mr Smith

I read a great quote recently: *Knowledge is a process of piling up facts, wisdom is
in their simplification.*

Whilst you Daggett, bog yourself down with Friedman, Chile, the US, plus all
sorts of conspiracy theories about who did what and why, I ignore all that and come
to some very simple, basic conclusions.

I’m not the puppet of any Govt, loaded with people full of their own little agendas.
I know best how I want to live, where I want to live, what I want to do, what gives
my life meaning and purpose. Govt is there to serve the public, not the other way
around.

How others want to earn their money and spend their income, is best left up to them,
they can vote every day with their wallets.

The best thing that we can do is give people every opportunity to help themselves.
Anything else will limit their innovative abilities, which are the key to human progress.

Yes, there is a role for Govt to help the weakest and those who cannot help themselves.
Yes, some basic Govt regulations are needed to regulate certain
things in our society. That is quite different to people being the puppets of
the state, as they are in centrally planned economies, as distinct from market
economies.

BTW, AFAIK the South Australian Housing Trust still exists, with tens of
thousands of houses on its books, providing housing for the poor, much like
Homeswest in WA.

http://www.familiesandcommunities.sa.gov.au/Default.aspx?tabID=2013

These organisations have a role to play in our society. That is quite different
From Fidel’s Cuba, where people are puppets of the State, houses are
falling apart from lack of maintenance and I gather the size of new homes
is 700 sq ft or 65sq metres, or a quarter of the size of our homes. That’s a
shack, not a home :)

As to WA, we are one third of Australia in area, with just 2 million or so
people. We are certainly not overpopulated. We don’t even know how
much iron ore or gas are in the NW. Selling a bit makes perfect-sense.

Wiz, if your sisters are not prepared to lower their standards as to where they live and by what means, then they are simply going to have to bite the bullet and rent where they really want to live, rather than buy. Its simply supply and demand. Everyone of course would prefer to live in the best locations and in the nicest houses. Those that are prepared to lower their standards and make other sacrifices will eventually get to where they want to be, as by taking on lower value mortgages, they have half a chance of paying them off early, then using their equity to buy a place where they REALLY want to be. Its a bit like the good old uni graduate walking into a work place and expecting to be CEO within a year. The philosophy is the same. If you walk into a career with th right attitude and take the time to start a little lower and gain experience in all facets of the business, you are more likely to one day end up in charge.

Country Gal - the point is that my parents 25-30 years ago, on a single income, were able to afford very decent houses in suburbs like Box Hill, Mont Albert and ultimately Balwyn (where Mum still lives, though planning to sell soon). Today my sisters at a similar age can't even afford a small 1 br apartment in Glenroy or Coburg (roughly what they are renting, though my older sister is sharing), and both earn average or above average incomes for their age group.

As little as 6 or 7 years ago prices were reasonable enough for them to at least be able to afford such options, and for us to be able to avoid a small 2-br weatherboard on a main road in Blackburn. Today, if we were first home buyers, we wouldn't even be able to afford that (at least, not without my wife working full-time in a well paid job).

I think it's fair to say the experience of my family is fairly typical of millions in Sydney, Melbourne and Brisbane particularly.

Yes, it's supply and demand - but there's been a huge surge in demand from investors and speculators with considerable cash at their disposal, and very little change in supply. Hence first home buyers have lost out in a major way. The whole point of the discussion is to look at ways that situation can be ameliorated, or at least avoided in the future once the market eventually returns to reality.

Yabby wrote: "BTW, AFAIK the South Australian Housing Trust still exists, with tens of thousands of houses on its books, providing housing for the poor, much like Homeswest in WA."

This is the fourth time you have made a dishonest pretence at having answered my argument, when, in fact you had not. My argument was this:

"... the housing Trust of South Australia for years made good quality housing available to all levels of South Australian society and never cost the taxpayer a cent."

(Note, Yabby, ALL levels of South Australian society, not just the 'poor'.)

"The example of the HTSA confirms absolutely that Australians could do very well without the private property market. By having run down the public housing sector since the 1950's when Menzies began the process of privatising it, Australian governments were only doing the bidding of the private property sector to the detriment of the rest of society."

---

As a consequence of the privatisation of the housing market, the median cost of housing has increased to 8.5 times average income where it was 4-5 times 10 years ago as originally note by Mr Smith.

No amount of sermonising about how we should learn to 'lower (our) standards' can get around the fact that we have paid a massive cost for our various governments' folly of privatising the housing market.

Proponents for property speculation including, Country Gal, Col Rouge and yourself, would have had us believe that the unearned profits earned by property speculators fell out of the sky.

They never did.

They are being paid for out of the pockets of today's renters and homebuyers. The example of the Housing Trust of South Australia is absolute confirmation that this appalling situation was wholly avoidable.

That is the simple truth that you refuse to acknowledge with your endless repetitive sermonising, red herrings, personal attacks and other assorted debater's tricks.

Daggett, I don't see how you can argue "unearned profits earned by property speculators" have come from the pockets of today's renters. Property speculators have made profits by selling properties to others who have genuinely created their own wealth.
I also doubt that many first home buyers (who haven't had a chance to create much wealth anyway) are handing over very much to property speculators, though I don't doubt it does occur.
Further, I wonder if property speculators as a whole *do* make all that much of a profit in the long run - considering how much of the money used to buy the properties is borrowed and must be eventually paid back. But as long as there is an impression that big profits can be made, this drives up demand, and hence prices. I assume you have some familiarity with the work of Robert Shiller and his book "Irrational Exuberance" (http://en.wikipedia.org/wiki/Irrational_Exuberance_%28book%29).
Government policies that can help damp this impression are surely worth investigating.

Daggert, your examples may well hold true for the SA market (I dont have the time to investigate fully), but the SA market has responded in similar ways to other markets that HAVENT had the huge public schemes. So that to me says that the closure of this system had very little impact at all in real terms.

How property speculators profits are being sourced comes back to what you define as a speculator. A large number of housing investors hold their asset for extended periods of time and fully expect it to become positvely geared. This to me is not speculation, its long-term investment. Given the quoted rises in rented properties vs owner-occupied, I'd suggest that the "speculators" profits are coming out of the pockets of other "speculators" (or at least accumulators). If owner-occupancy was on the rise, then I'd accept your argument.

Wiz, I do understand what you are getting at, but 25 years ago our population was much lower AND much more widespread. There has been vast immigration AND vast migration to the cities since then, and this all drives up demand. People can either choose to live in NY-style small apartments so that they are close to work, beach etc, or choose to live further out (or not live in the city at all). The only way to get new developments is in more intensive housing, or in mor distant developments. You appear to indicate that neither of these is desirable. If this is the case, then no amount of tax-law manipulating is going to change the problem. There will still be high demand for the popular suburbs, that will continue to grow as a larger number of people earn above average wages and cn afford to live there (notice that while percentages might stay the same, it is the base number that affects land values, as the land in its current state can only hold the same number of people).

*Note, Yabby, ALL levels of South Australian society, not just the 'poor'*

Daggett, perhaps you should take the trouble to read the history of the
SA housing trust, why it was set up, what it achieved and how.

http://www.housingtrust.sa.gov.au/resources/SAHT_Chronological_History.pdf

A private property market existed long before the trust was set up. The trust
also built and sold properties, which once again joined the private market,
well before Menzies mattered much. The market that you hate so much,
has been there all along.

By 1951 the trust had completed 10’000 homes, today it has around 50’000
homes on its books.

So a private property market is nothing new. What is new is that with modern
day finance, anyone can buy a home, unlike those days, when banking was
regulated and finance extremely difficult to obtain.

The trust had access to Govt land, Govt finance and paid no sales tax. Of
course its not going to make a loss! I have yet to establish how much interest
they paid, on the hundreds of millions of $ that they borrowed. I note that they
repaid a lot of this money, by selling into the private property market, which
you hate so much.

Many families and their progeny, would be making handsome profits from the
houses that they bought from the trust. What were then farm paddocks, due to
population growth have become established suburbs, with a location value,
as has happened in all capital cities.

It seems that they had similar problems as Homeswest homes. They were
built to a pretty low price, so mainly el cheapo tiny weatherboard homes,
badly insulated. A lot of these homes are now being dozed and rebuilt in
double brick, depending on the location of the land and its value.

Thankfully I had the choice to build the home that I had dreamt of, with
solid foundations and double brick. It will last for 100s of years, like
those mentioned by Smithy on another thread.

The housing trust applied a maximum rental value of 8% of the building
cost. Today’s house renters would pay similar amounts.

Hi Mr Smith, cacofonix, daggett, Bronco Lane and others:

Direct action re housing costs – a letter to Treasury (architects of current mess)

Draft letter at http://zzalanz.googlepages.com/firsthomeowner

You probably know why investors acquire most properties in Australia. Consider:

A property buyer generates say $300000 loan interest on a $250000 loan

INVESTOR can claim all $300000 loan interest as Loan Interest Deduction

HOME-OWNER/BUYER can claim $0 Loan Interest deduction

$300000 versus $0 deduction – where is the equity in that?

BASIS OF ARGUMENT:
Investors can claim a deduction on Loan Interest.
Home-owners cannot claim Loan Interest deduction.
Tax advantage to investors in the common market of property.
Investors will acquire more properties due to this anti-competitive tax ruling.
Responsibility of Treasury to “remove impediments to competition in product”.

Allowing investors and not home-buyers to claim Loan Interest deductions on
income tax is INDIRECT DISCRIMINATION AGAINST HOME-OWNERS/BUYERS.

OPEN LETTER - To Treasury: Dear Sir/Madam:

“I would like to lodge a complaint to Treasury concerning the discriminatory
effect of a tax deduction that I feel is negatively impacting the next
generation of Australians as well as current home-owners/buyers.

The tax deduction that appears as an “impediment to competition in product”
and demonstrates a complete lack of “horizontal equity” at all between
investors and consumers when it comes to purchasing a “product” called
residential property is:
Item 20Q – Loan Interest Deduction (Supplementary Taxation for Individuals)

I believe that Item 20Q, being an “impediment to competition in
product” has an “indirect discrimination” effect on the ability of potential
/ actual home-owners to buy a product called residential property.

I would like to ask someone in Treasury to answer these two questions:
1. Why is Item 20Q not considered to be an “impediment to competition in
product” (the product in this case being residential property), given
residential property is purchased by consumer/home-buyer and investor alike
whilst only one category of “product” buyer, ie. an investor, is given
access to Loan Interest deduction?
2. Why is Item 20Q (available only to investors) not in effect “indirect
discrimination” against home-owners/buyers?

Remainder can be found at http://zzalanz.googlepages.com/firsthomeowner

Yabby,

The HTSA was not strictly socialised housing, but it was run ultimately for the Government on on a non-profit basis in order to spare SA from having private developers monopolise the supply of housing. For decades, South Australians did not need to support unproductive layers associated with the private property market, or at least not nearly to the extent that the rest of the country did, so their manufacturing economy thrived.

You seemed to imply that they actually did make losses by having to sell off the farm. I would like to see the evidence of that. If you are right, then it would indicate that the HTSA was not entirely cost-free to the taxpayer. Nevertheless the cost would have had to have been vastly less than what it would have cost if they had let property speculators run the show.

I have lived in South Australia and in my experience the quality of housing supplied was very good.

Country Gal,

Obviously there can be costs which cut into the profits of land speculators at time when property prices are not skyrocketing. However, most of the costs incurred that you described are essentially for non-productive economic activities.

Whether the money ultimately goes into the pockets of speculators, real estate agents, banks or mortgage brokers, they are paid for ultimately by renters and homebuyers and could have largely been avoided if we had not privatised our housing market.

Daggett, the HTSA was set up to solve social inequality in housing, but you have
to relate to conditions of the time, in 1936. There were no banks lending money
like today, no investors renting out houses like today, much of Australia’s wealth
was still being controlled from Britain. Finance was the key, not land.

There was a critical shortage of housing in SA and it was the job of the HTSA to solve it.
They were provided with money and land by the Govt and did exactly
that, providing mainly rental and some purchase homes to thousands. They landed
up importing lots of prefab homes from Europe, to try to solve their problems of
not enough houses and not enough labour to build them.

AFAIK their debt to Govt eventually ran up to 370 million $ and that was repaid
by selling off real estate to the commercial market. Their focus was always to
provide housing for the less privileged, as it remains today.

Homeswest in WA provide a similar role still today, as the HTSA did then and does
now. People on lower incomes can apply to rent homes, buy homes, they will be
assisted within various schemes, to achieve their goals. Keystart loans in WA are
proved to families with an income below 70k$, AFAIK. Rental assistance is
provided, to those who need help.

It seems to me that your understanding of history is a little distorted. It was not
property developers that were a problem, but a lack of banks prepared to lend
workers money to build houses.

Even in the 1970s, before bank deregulation, I remember dressing up in my
Sunday best, to present my budget to the Commonwealth Development bank.
I was knocked back within a few days, they predicted that I would soon go
broke.

Well,

Many thanks to treasury_broadside, not least of all for introducing something new here.
_______________________________

wizofaus, daggett et al.

As you may already be aware. it would be safe to say at this stage of the thread that you are being subject to monumental wind-up.

There is nothing left here that hasn't already been exhausted & recycled.

Your contributions have become prompts that are patronised with abstract, self-serving, home-spun homilies that would be pretty much the same regardless of what you said or anything else that has been said in the entire 32 pages of this thread.

For example:

"with modern day finance, anyone can buy a home"

"they just get off their butts and help themselves"

"every day battlers who don’t whinge and complain, but get on with life and make the best of what they have"

"Its simply supply and demand" (Jesus H!)

" Those that are prepared to lower their standards and make other sacrifices will eventually get to where they want to be "
etc. etc.
________

You can't argue with observations like these. You're not really meant to.

These assertions don't concern themselves with specific historical context, consistent quantified comparisons or any other such notion. They are a mockery of method & purpose.

Some the ‘points’ that you have countered on the last 2 pages can probably be found on the first 2 or 3 or 4…

These ‘points’ don’t respond to yours. They simply wait for a shuffling of context & an opportunity to be reasserted. This amnesiac loop frustrates & disrupts the linear progress of the discussion.
Which may or may not be its purpose, I don’t really know.

For example (just 1 example):
“There has been vast immigration AND vast migration to the cities since then, and this all drives up demand” etc.

You know (& they know) that population can’t account for a 150-200% price increase in a few years, its already been done to death & as such – no, there is probably no point in responding. Not seriously.

That is entirely your choice of course.

-Mr Smith

Country Gal, where do you get the idea I believe that "more intensive housing" is not desirable? Australia's cities are among the most least dense in the world. We could double the density of them (i.e. another 8 or 9 million people, with no need for more land) without them even coming close to approaching the density of New York (or London or Paris). To suggest that the choice is between NY-style apartments and 5-Br McMansions on 1/4 acre blocks is absurd, but as it is, in many suburbs here, not even "NY-style" apartments are affordable (of course, they're not very affordable in Manhattan either, but do you don't have to move that far away from Manhattan for reasonably affordable housing).
Now here I agree that government regulations preventing denser housing is a problem, and I would very much support seeing those regulations loosened. But I don't think it's the major part of the problem, given the scale of the price increase relative to the population increase, especially in the last 6 or 7 years.

Mr Smith,

You were spot on when you wrote: "These 'points' don't respond to yours. They simply wait for a shuffling of context & an opportunity to be reasserted. This amnesiac loop frustrates & disrupts the linear progress of the discussion."

---

However, I do differ with your apparent view that immigration-driven demand is not the major driver of housing hyper-inflation.

Of course there are other drivers and they would include:

1. The sheer number of people who now derive their incomes unproductively through real estate transactions, whether directly or indirectly (why is this somehow more morally acceptable to some than people deriving far more modest incomes from welfare?),
3. Availability of Australian real estate on the Internet,
4. Rising costs of natural resources,
5. Dis-economies of scale. As cities grow larger, the quantity of roads, water pipes, etc. per individual must necessarily increase.

In regard to population-driven demand, surely you can appreciate that housing prices should not be in direct linear proportion to the this country's population? If a substantial proportion of the population stand to go without housing or be faced with having to live in an unsuitable location with few services or unacceptable commuting times, then it seems intuitive that it would cause many to bid up the cost of suitable housing well above what would be in proportion to the actual population increase, and that is certainly what seems to be happening now in Queensland and elsewhere.

Have you had a chance to read Sheila Newman's submission on behalf of Sustainable Population Australia to the Productivity Commission's inquiry into housing costs? It's downloadable from http://candobetter.org/sheila/ as is her previously mentioned Masters thesis on Australia's growth lobby.

It would be useful to pursue this question further elsewhere, perhaps on another OLO forum, or I could set up one on http://candobetter.org/forum

It's also been extensively discussed at http://forum.onlineopinion.com.au/thread.asp?article=4834#53462&page=0 (although the discussion there was also marred and needlessly prolonged).

---

Also, Yabby's plea that population growth is the driver of housing inflation is clearly disingenuous as he is clearly doing what he can to encourage population growth in WA.

Smithy, this weekends Financial Review contains a special report on real estate,
listing every median average house value by suburb for Australia. The front
headline kind of says it all. * The market has been driven by cheap and easy
credit*

If you look at each postcode, you’ll see that location is what its all about.
If you want to live in Palm Beach or Balmain, it will cost you a couple of
million, yet there are plenty of places in NSW with a median house price
below 200k$. They quote the median house price for each postcode over
10 years. Averaged out, its been around the 10% a year mark. Given that
interest rates dropped dramatically in those 10 years, that’s not remarkable.

Given that more people are earning great salaries and that population has
grown, why should it be surprising that in some areas, houses have become
hugely expensive? High income earners will always be able to outbid low
income earners for property.

Daggett, my claim was that there are many drivers of housing inflation,
population is but one of them. I personally would prefer to use Australian
gas for energy, rather then Arab oil. WA needs people to develop these
projects. If Eastern States people don’t want the jobs, we’ll just have
to bring them in from overseas. There is still plenty of affordable real
estate in WA, just not in the yuppie suburbs, where I really would not
want to live anyhow.

People in real estate are like any other industry, they provide a service,
you can take it or leave it. Nobody forces you to use an agent. Go
and buy a pair of shoes, somebody sells them to you, somebody wholesaled
them, somebody provides the shopping centre where you go to buy them.
Last time I saw figures, the average pair of shoes from China cost around
the 5 US$ mark Lots of people make an income from those shoes along
the way. The cost of distributing something can be far higher then
the cost of manufacture. The real estate industry is no different

I think this land speculation is scandulous.Anyone who says that holding on to land within suburbia (which was meant to be built upon) for more than one year should be called a racketeer.If governments release lands, who do they contact first, their mates ofcourse! It is who you know in this game not what you know! If someone needs a home to live in and is prepared to build on a vacant block, once bought there should be a rule to build the house within ONE year.After one year the permit to build will expire and a new permit bought, do this for three years and the block will be auctioned off.Voila! No more chances for the speculumators.Let them work for their money so business doesn't have to import cheap labor.In meantime abolish landtaxes and put a set price on land so every young couple can afford to build a house to LIVE in.

Yabby,

Concerning your previous claim about being "middle of the road" (which is really a red herring anyway, but since you have made that implausible claim, I think I am entitled to pursue you over that), I ask you again:

What "Labor" policies you support which were not policies which were not already Liberal policies anyway?

If you can't point to any Labor policies which you support which were not already supported by the Liberal Party and which did not originate from Milton Friedman's extremist Chicago School of Economics and which were not first imposed by military dictatorships upon the people of Latin America, then I would suggest to you that your claim of being "middle of the road" is very hollow indeed.

Daggett,

Re, your enquiry:

“I do differ with your apparent view that immigration-driven demand is not the major driver of housing hyper-inflation.”
“surely you can appreciate that housing prices should not be in direct linear proportion to the this country's population?”

Yes I can appreciate that.

There would be a ‘multiple’ as you suggest. As to whether I believe that multiple would be of a magnitude that would transform a single-digit population increase into a near tripling of house prices within a few years, the answer is clearly, absolutely & unambiguously – no.

The reason for this lies in the nature of supply & demand in different markets.

In consumer markets that sort of inflation only occurs in the case of necessities (“inelastic” demand) that are also
consumables/perishables (consumed & replaced daily eg. food or petrol)
when there is an extraordinary supply crisis
(availability decreases in absolute terms).

Rather than being consumable the available supply of housing is relatively permanent. It is virtually never reduced (earthquakes & missile strikes notwithstanding) it constantly increases - your point being that the population has increased at a faster rate.

However the (relatively gradual) pattern of population increase over time bears no direct relation to the sudden & volatile nature of the price bubble.

There is however one form of market where phenomenal price growth rather than being extraordinary is commonplace – investment markets. The stock market for example where the price of a stock quite often exceeds its fundamental value due to speculative investment. This also occurs in housing.

For a quick insight I refer you to Investopedia’s definition of “Housing Bubble”

http://www.investopedia.com/terms/h/housing_bubble.asp

For a greater insight I noticed that Wizofaus referred you to Robert Shiller and his book "Irrational Exuberance"

http://en.wikipedia.org/wiki/Irrational_Exuberance_%28book%29

I also refer you to the article that inspired this thread (&my posts on pages21&22).

For the inflationary significance of increased population (relative-to-supply) rental vacancies & rents are your best indicator. Tenant demand is solely consumer demand.
Rents have increased but nowhere near as much as prices. The discrepancy between rent & house-price increases indicates the level of speculative excess

True-to-form Yabby,

Re. significance of “cheap and easy ]credit”

I refer to paragraphs 13, 15 & 19 of the aforementioned
(Executive Summary of the)
Reserve Bank’s submission to
the Productivity Commission Inquiry on First Home Ownership.

http://www.rba.gov.au/PublicationsAndResearch/SubmissionsToParliamentaryCommittees/productivity_commision_inquiry_on_first_home_ownership.html

I largely concur with them.
_________________________________________

Re. significance of “great salaries” on property prices:

I remind you of the quote from this article -

“City house prices easily outstrip wages” ( Financial Review 25/9/07)

as it appears on Page 14 of this thread.
______________________________

As for the repetitive loop phenomenon, I’m not sure whether its method or madness.

-Mr Smith

Smithy, indeed the RBA document makes some very valid points! Their focus
is on the word “investors”, not speculators. That’s why I think the wording
of this thread is wrong. If you read paragraph 9, they concur that there are a number
of factors affecting the market, which has been my point all along.

Now at some point you have to think beyond what the rba are saying and look at
solutions. You as some would, would prefer to punish investors for saving etc.
I prefer to wonder why they are so focussed on housing for their savings.

Fact is people want something that is safe, tax effective and copes with the
effect of inflation eating away at hard earned savings, or its easier just to live
it up and spend the lot. Housing is at present the best option, why not give
people other options?

Given that our current account is what it is and that increased savings could
change it dramatically, why not provide some carrots, rather then your stick?

If Wiz’s sister saves 50 K$ for her home, any interest is taxed at the maximum
marginal rate, inflation eats up the balance. Where is the incentive to save?

Why not make the interest on the first 100k$ saved for home ownership, tax exempt?

Why not index interest on bank deposit returns for inflation, so that people are
compensated for inflation loss? Give people incentives to save and they will do
so, which can only be good for our current account. Carrots work much better
then sticks.

Daggett, the liberals, labour, the Chinese, Russians (Gorbachev) have all realised
that market economics is not perfect, but is the best option available.

It seems that even your old friend Fidel, is coming around slowly, after all this time.
He declares himself a “utopian socialist”, but of course there is no utopia, just the
reality of this world.

http://news.bbc.co.uk/2/hi/americas/7163672.stm

Market economics where allowed, is working in Cuba

http://news.bbc.co.uk/2/hi/americas/6923717.stm

Keating once wisely commented “in the race of life, always back self interest”

Very true, don’t kid yourself that it’s not.