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.