And the reverse in the case of a loss: the entrepreneur has devoted scarce factors of production to a use that the consumers consider less urgent, thus wasting the resources and causing a loss in value.

The buying and selling of shares *is* the readjustment of the factors of production, namely capital funds. It has just as much claim to productive activity as have the activities of the butcher, the baker and the tailor in buying factors of production and re-allocating them to different combinations with a view to profit by satisfying the needs of consumers; only the consumers in the case of the share market are the consumers of capital funds, rather than of consumer goods.

So bearing that in mind, what has been contributed to the economy when the shoemaker sells the second house to the carpenter? A: the carpenter has now got two houses, which he considers more satisfactory than having only one, which we know by logical deduction from the fact that he bought them; otherwise he wouldn’t have done it.

>As we've pointed out before, a 50-square house that provides a dwelling for one person isn't more productive than a 15-square house that provides a dwelling for one person.

Yes it is. It’s more productive of dwelling-space, by 35 squares. Perhaps people *shouldn’t* want larger houses; but the fact is, they do.

But the rest of your article is right: what goes up, must come down, and the housing bubble must eventually pop. But that’s not because housing is not productive. It’s because money substitutes – credit – channels scarce resources into the sector in which they enter the economy - housing - which causes prices to rise in that sector, which causes people to seek capital gains there, which diverts scarce capital from elsewhere, to be channelled into the housing sector, out of proportion to its actual productivity compared to productivity in those other sectors absent the inflation.

Oh don't you see? The tax payers are paying for this supposed 'loss' of the landlords via negative gearing. It's the owner-occupiers who are the real fools.

BUT, with so many home owners the government will do anything to stop a correction. There is fewer first home buyers than there are people wanting to retire on their housing equity.

Any government who allows a housing crash will be turfed out quicker than you can say negative gearing.

So rant about doom an gloom all you like, you underestimate the governments desire to distort the market.

BTW: I agree the investment in housing is not as productive as some things. But then worshipping at the church of Bunnings does help the economy. Especially when the DIY cowboys end up having to hire plumbers, electricians and carpenters.

>>exactly where in the example has anything of any value been added to the economy?

>>> How does the buying and selling of a house contribute anything to an economy?

Simple.

The profit, in most cases has been spent, either on another house and or on something else, hence, the ecconomy has gained from this surplus.

There are also the fees attached to the buying and selling of houses.

Lawyers, agents, councils, advertisers, the list goes on. All make money from the sale of property and all spend their earnings which helps drive the ecconomy.

>>Call us mad if you will, but we're yet to find anywhere in our investing textbooks where it says making a loss from your investments is a good idea.

Simple explaination.
We buy a property and take a hit for a few years until the rental income covers the costs through the increased values. Then, you simply buy another, again at a loss until the same is repeated.

If things get tough, which I doubt they will the way Gen-Y wastes money and will therefore continue to be mostly 'renters', we simply sell one, two or more, pay off some debt and ride it out.

A few tips
Don't have all you property in the one area.
Spread your property from beach, to cities, to mining towns.
Don't buy where there are few jobs or the area relys on uncertainties.

Thanks, but I will take my chances.

*The lure of making money from houses has taken money and resources away from the manufacturing industry and other industries and instead invested it in housing.*

That is a bit of an over simplifaction. Most people who invest
in houses, like the fact that they are in control and can actually
see what they have bought. Unlike the stockmarket, which needs
a bit of understanding and we all know of examples where money
managers can make investments vanish into thin air!

So I doubt if these people would rush out and invest in Australian
manufacturing, for much of it is hardly profitable.

Next, if people invest in their own homes, all profits are tax free!
If they invest in houses, capital gains tax at least allows for
inflation, (that is why Costello reduced it), unlike bank deposits,
where Govts ignore the reality of inflation and rob deposit holders
by way of taxation.

I agree, we have a housing bubble and if China should sneeze, our
bubble will pop. But many of those investors can afford to think
beyond popping bubbles and when viewed over 25 years, they will
still come out in front.

It it those who are overgeared, who will shed tears, for they were
simply too greedy for their own good, so will learn the hard way

Yabby >>Next, if people invest in their own homes, all profits are tax free!

Not really. You see most people who buy their residential home, also have a mortage. Now although their 'capital gain' may well be free, their interest and other 'outgoings' are not free as they are all paid for with 'after tax dollars'.

Now we know the average mortage is $300K and, the interest componant of that is around $18,000 per year. So, assumming the property is purchased for say $380,000, this means the property must increase by almost 4% each and every year for the capital gain to be worth while.

Now with the investment allowance, currently 50%, it may be worth buying the house in a trust and renting it yourself when considering the tax benefits collected along the way.

$18,000 per year in interest alone.

Rehctub, indeed profits are tax free. The little old lady who
bought a house 40 years ago for a song, can sell it for 2 million$
and pay no tax. The home owner-owner renovator, can buy an old
shack, doll it up with his labour, which adds value, then on sell
that home, all tax free money.

Last time I checked the % of Australians who actually have a
mortgage on their first home, is not that high, something like
30%. Some prefer to rent, some have paid it off, pensioners,
baby boomers etc.

All those who bought houses more then 10 years ago, would not
be owning much in real terms, due to the benefits of inflation.

If you Rehctub, pay cash for your house, you can earn substantial
amounts from capital gain, all tax free. Buy any other kind of
investment and get hit with capital gains tax.