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Illusion cops a beating from reality

Discussion in 'General Discussion Forum' started by Fluffy, Mar 21, 2007.

  1. Fluffy

    Fluffy Well-Known Member

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    Illusion cops a beating from reality
    Email Print Normal font Large font Ross Gittins
    March 21, 2007

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    AdvertisementTimes are getting tougher for John Howard - and I'm not referring to a few embarrassing resignations from his ministry. No, it's the economy. It's growing so strongly the Reserve Bank is contemplating raising interest rates again. And that brings us to housing. The factor that contributed so much to Howard's victories in elections past may start costing him votes.

    We're at the point of experiencing the downside of the housing boom. Many home owners have been most gratified to see the value of their home at least double over the Howard Government's 11-year term.

    But economic theory tells us the feeling of increased wealth people enjoy is an illusion. And we've reached a point in the housing cycle where they'll find that easier to accept.

    Think of it this way: the inhabitants of an island have roughly the same stock of homes they had before, but now they've decided those homes are worth twice as much as they used to be. How does that leave those inhabitants better off?

    When you look at it from the viewpoint of the community as a whole, you see we're not better off. Why not? Because you've got to live somewhere. Were you to sell your home to realise the increase in its value, you'd either have to buy another place to live in or rent another place.

    The house you move to will also have doubled in price. Alternatively, rents will have increased to reflect the higher value of the place you're renting.

    But if the notion that housing booms leave home owners better off is an illusion, why do so few of us see through it? Partly because it's pretty much only people with economic training who can look at things from the "macro" perspective of the community as a whole.

    Most of us only ever view situations from our own individual, "micro" perspective. And from the perspective of the individual, some people win from a property boom while others lose. (At the community level, these wins and loses essentially cancel out.)

    The outright winners are people who own homes before the boom starts, but are then able to "trade down" by moving to a smaller, cheaper home or to a cheaper city. And, of course, those who die. The outright losers are people who didn't own a home before prices doubled. These include renters, and also young people who may not yet have left home - or may not yet be born - but will wish to be homeowners in the future.

    But there's also a fair bit of self-deception. Remember that the primary reason for the boom was the halving of mortgage interest rates, which roughly doubled the amount people could afford to borrow.

    It was because so many people sought to "trade up" to a bigger or better home at pretty much the same time, with the supply of houses little changed, that we succeeded in doubling the price of homes. (An economist would say this exercise caused the benefit from the fall in interest rates to be "capitalised" into the price of homes.)

    The trick is that, although the price of the home a person was selling may have shot up, so did the price of the home they were buying. And since the home they were moving to was always the more expensive, its price probably rose by more - in dollar terms - than the price of the home they were selling.

    In which case, they're likely to have acquired a bigger mortgage. So it's hard to see why they imagine they're so much better off. A great many home owners would find themselves in this position.

    Now the boom is over and house prices are pretty flat - and falling in parts of western Sydney - the drawbacks are much easier to see. The first group with a hangover are those with big mortgages, who can't be too pleased to hear talk of another rise in interest rates, perhaps as soon as in a fortnight's time.

    Included among those fearing another rate rise are all those people with negatively geared property investments. Without the hope of continued strong growth in house prices, their resolve to stick with their investments will be sorely tested. Higher rates add to their monthly out-of-pocket payments (which are only partially subsidised by their fellow taxpayers).

    What started as a way to get rich quick has been transformed into a way to bleed slowly. More may decide to cut their losses and sell. It's likely that a lot of the mortgagee sales we're hearing about are of investment properties.

    Where investors hang on, it's likely they'll be determined to take advantage of the increased demand for rental accommodation relative to supply and put their rents up.

    Which means life is getting tougher for renters. Most don't know it but they've had an easy ride as investors piled into the market with their eyes fixed on unending capital gains and with rental income a secondary concern. Not any more. The usual way of escape from renting is home ownership, but for many that route's been blocked by the sky-high price of homes, made all the more unaffordable by steadily rising interest rates.

    And this brings us back to all those older people still congratulating themselves over the doubled value of their homes. It's easier now to see that the rise in house prices constitutes an inter-generational transfer of wealth from the young and unborn to the older generation of baby boomers and others.

    Ah, the sting in the tail. If you don't have offspring or grandchildren - or you do, but you don't care - you're laughing. But most of us do have offspring and we do care - deeply - about their future welfare and their ability to enjoy the Great Australian Dream of home ownership.

    As established home owners realise the extent to which their seeming good fortune has come at the expense of their descendants - and what this means for the boost those descendants will need to leap the barrier to home ownership - their perception of great housing wealth will be revealed as an illusion.
     
  2. Matabele

    Matabele Well-Known Member

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    Currently the income/expense ratio of most Australian households is 1/1.5.

    So the bubble is about to be pricked and we'll need to HAVE another recession.
     
  3. Guest

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    If labour win the next federal election then a recession is a certainty. I have heard that howard may retire before the next election - possibly around July if he is seen to be the main obstacle to Liberals winning again..

    Historically house prices have doubled every 7-8 years for the last 100 years.
     
  4. Fluffy

    Fluffy Well-Known Member

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    its the % of gross income that peple spend on their mortgage that shows everything in relevance, in the 70's you it was about 25%, now its around 37.5%

    or 1.5 times

    The only reason we arnt techinally in a recession is the minerals sector as a country and christmas as a state (NSW). WA is making leaps ahead with Qld and NT following but Vic, NSW & Tas are struggling.
     
  5. Guest

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    The lenders have a lot to do with that as well. When I worked for the CBA in the eighties we used to lend max 35% monthly commitment level. Now the bank will lend up to 50% and in fact I have seen them approved at 55%.

    Unfortunately state and federal goverments (particularly NSW) need to take the blame for out current and future predicaments.

    I agree that we are stuffed when the mining boom winds down (hopefully slowly) because we still can't get our current account in the black now even with all the extra minerals being exported.

    The federal govt should never have given us the last couple of tax cuts and instead should have put the surplus towards improving public transport and infrastructure in every state particularly NSW.

    They should also have made the GST 12.5% and made the states wipe out stamp duties, capital gains tax (federal) and payroll tax. At the current rate of 10% we have lost almost no taxes but ended up paying an additional 10%.
     
  6. Fluffy

    Fluffy Well-Known Member

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    GST has hurt NSW also in that we dont get back what we put in - it goes to Qlders fuel

    eg this morning on the cheapest fuels around the states everywhere was about 119.9 - 121.9 exept qld which was 112.9 or there abouts and its the same every morning when i see it.
     
  7. Guest

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    Agree the GST share needs to be more even to NSW.

    However I doubt that this will happen while there is a federal liberal government as they want NSW to be back in liberal hands again and won't do anything to help the curent labour govt.

    I would bet that our share increases should the Libs somehow win on saturday.
     
  8. The Gronk

    The Gronk Well-Known Member

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    Well a majority of states have to vote to change the funding arrangement. I can't see QLD, SA, Tas and WA voting to give themselves less money. But hey, if the Libs win then maybe some extra money could go towards paying for the 40 odd billion worth of promises Peter Deadman has made.

    Also I like the idea that none of the problems are Howard's fault, yet at the same time he might retire so the Libs have some chance of winning the federal election. I didn't know it went both ways.

    I must say I am not too pleased with the housing situation, we are a professional couple on good incomes and have saved up a pretty good deposit, and we can't even afford a house, even a dump within 13km of the city. And we are only in Melbourne!!
     
  9. Matabele

    Matabele Well-Known Member

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    Howard could be doing you all a favour. a strange life where we all strive to be a slave to a mortgage!
     
  10. Fluffy

    Fluffy Well-Known Member

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    beats being a slave to your landlord in most cases.
     
  11. Matabele

    Matabele Well-Known Member

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    That assumes there's only two options.
     
  12. Fluffy

    Fluffy Well-Known Member

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    what are the others?

    Living on the street isnt really suitable for raising a family
     
  13. Nutzcraw

    Nutzcraw Active Member

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    You guys deserve to give us QLDers money.. we are what gives this country it's credibility :)
     
  14. Guest

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    It is no different in any other civilised country - japan, USA, UK, NZL etc all have the same high cost of housing.
     
  15. Matabele

    Matabele Well-Known Member

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    It is no different in any other civilised country - japan, USA, UK, NZL etc all have the same high cost of housing.
    [/quote]

    Which means we humans are a weird mob!
     
  16. clontaago

    clontaago Well-Known Member

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    Fluffy please explain your comments above in more detail, i'm intruiged.
     
  17. Guest

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    Fluffy please explain your comments above in more detail, i'm intruiged.
    [/quote]

    In rough figures NSW residents pay something like $12.5 billion each year in GST which is collected byt he federal government but only receive back from the Federal government about $10 billion.

    In other words $2,5 billion of what is collected in NSW actually goes to other states such as QLD etc which they use for infrastructure, lower state government taxes such as stamp duty etc.

    Not sure how it all came about but it is agreed on by all (most) state premiers and the federal government.

    While is seems that we are losing a lot of revenue the facts are that NSW is several billion dollars each year better off from additional GST revenue but the ****ers just waste it just like they did with all the additonal stamp duty revenue that they received when the property market was booming a couple of years ago.

    If any government was running and actual business thye would have gone bankrupt years ago. The one importance difference is that they are the only business allowed to collect tax as their revenue.
     
  18. Canteen Worker

    Canteen Worker Well-Known Member 2016 Tipping Competitor

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    Our biggest issue that is that the accepted adage is that Govts have to run a surplus. None of them will go into debt (paid off over time) to provided infrastructure in anything. Hence all they can do is sell off assets - leaving greedy enterprise to build stuff and charge through the nose.

    The losers - US!
     
  19. The Gronk

    The Gronk Well-Known Member

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    The redistribution of taxes to favour some states over others started at federation. The idea was that underdeveloped states (QLD, WA, Tas, SA) needed extra funds to get themselves going, which was provided by VIC and NSW. The problem is that these days QLD and WA are probably doing better than any other states yet they are still being propped up. The only way it can be changed is for a majority of states to vote to change it, and given that 2 states are propping up the other four it will never happen, or for the feds to change the rules entirely.
     
  20. Fluffy

    Fluffy Well-Known Member

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    clon - as gronk said

    not true CW - after greiner the state was put on credit watch when the debt was at 15.9% of State gross product, currently under iemma its approx 5% and will increase to 9% over the next 4 years as the infrastructure projects occur.

    One of the big problems Carr faced is that the state debt was so high we had a creadit watch and that is why there was little done in infrastructure for many years. What we needed was a more balanced approach after that debt was reduced to under 10%.

    What scares me is that debnam has greiner calling the shots and if he gets in the extra 5.6 billion will send us right back up there again thus the cycle may start again.

    Iemma seems a fairly middle of the road type so i think he is probably the best option to keep the improvements going that he has started without killing our state like greiner.
     

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