Wednesday, December 31, 2008

Statement concerning the failure of governments to govern

With regard to watching the housing 'boom' unfold without oversight, disenfranchising the next generation, we can only accuse governments of callousness and indifference, if not rampant profiteering wherever possible.

Housing and the real estate industry has become a giant Ponzi scheme, and governments are happy to simply sit back and observe — when they're not busy selling off Crown land to the highest bidder themselves and taking increasing stamp duties to plump up their coffers. With rising interest rates and property already hugely overvalued in Australia, we are about to witness a train wreck in slow motion as the Ponzi scheme comes off the rails.

Well paid but highly unimpressive ministers, advisers and public servants fail to see the economic chain of cause and effect caused by allowing speculation in housing and land to run rampant. Lowering interest rates to stimulate the economy (often after a stock market crash, also caused by speculation) only leads people to irrationally pour capital into housing instead, elevating prices well above sensible returns on investment, and denying affordability to many, causing a failure of the social settlement. High mortgage repayments lead price setters such as shopkeepers to elevate their prices to cover their living costs. (However, high mortgage repayments also cause consumers to draw back from making purchases.) The higher cost of everything eventually causes industrial unrest and disruption and wage inflation, and eventually sparks a spiral of general inflation. The response is to push interest rates up again, causing more damage to home budgets and businesses. Nobody's quality of living has gone up except for real estate industry workers and the empty nesters who cashed out their homes. Meanwhile, governments keep taking things out of the CPI calculation to try to keep wages under control by hiding the real size of inflation. For some reason, you don't seem to get this story anywhere, not from the Reserve Bank, not from Treasury.

CHIRS - Community Housing Online:

With regard to the politicians, with their 2 year longview on everything:

The main barrier to progress appears to be that housing continues to lie off-centre from the main economic, social and political concerns of governments at all levels. In part, this involves an inertial lag effect. For most of the post-War period, the vast majority of Australians have been well housed by historical and international standards. Housing, labour and financial markets worked together to ensure that housing standards were adequate or better for perhaps 85 per cent of the population. A similar proportion of the population became home owners at some time during their lives. The fact that this dominant housing career and expectation has broken down over the past 20 years appears to have eluded many policy makers, who still look to the housing market operating within conventional parameters to meet housing needs for all but a tiny residualised group in the population.

It is this dominant view—along with the tendency to uncritically celebrate house price inflation as a sign of a healthy economy and domestic world—that needs to be taken head on by people concerned with both Australia's long term economic sustainability and the immediate social problems of declining housing affordability for an increasing number of Australians.

Show me the money: financing more affordable housing - Mike Berry

While it lasted, the boom added substantially to the wealth of existing home owners, but it has made home ownership more expensive for aspiring new buyers. In its aftermath, three questions arise. First, who financed the capital gains that home owners have enjoyed? Second, has home ownership become unaffordable for the younger generation? And third, what, if anything, should the government be doing to help young families get onto the home ownership ladder?

Rapid house price inflation also has wider economic costs, for it can distort the way we use capital. The Productivity Commission notes how, ‘Rising prices can create expectations of further price increases, unrelated to any change in market fundamentals. Young workers rush to take out huge mortgages before house prices spiral out of reach, and older buyers are seduced into investing in rental property while disregarding falling rental returns. Panic buying creates a housing ‘bubble’ which sucks money out of productive investments and eventually threatens the whole economy.’

Just as damaging in the long-term are the sociological effects of high house price inflation. The longer a housing boom goes on, the more it is likely to foster what Max Weber called a spirit of ‘booty capitalism’ emphasising pursuit of short-term windfall profits at the expense of hard work, thrift, enterprise and long-term planning. When passive ownership of a house delivers riches far beyond what most people could accumulate from many years of working and saving, traditional virtues emphasising hard work, saving, enterprise and deferred gratification are likely to get eroded, yet these are values on which capitalist liberal democracy ultimately depends. Savings, certainly, have been in free-fall. The household savings ratio, which was 10% in 1990, is now negative, and debt servicing is costing an average of 9% of personal incomes.

After the House Price Boom - Is this the end of the Australian dream? - Peter Saunders


Sylvie said...

All of us following the HB news and blogs are aware. Now with the MS media announcing the bubble burst hopefully the message has trickled down to masses. The upcoming election should tell volumes. If the preceeding polls are right people even those who put in the GOP last time around are fed up. Hopefully that will bring new policy changes that are sorely needed.

Anonymous said...

Finally. I'm so glad I found this page. I've been saying this exact same scenario for years, it's common sense.

What's sad is the selfish, rapacious greed which a majority of Australians have willingly become a part of. The arrogance people display now, thinking they are the richest people in the world, is against all "Australian Values" which the Federal Government touts so much as necessary for new immigrants, but has helped to erode entirely. Was Steve Irwin the last true Aussie?

I must admit, I feel sorry for those people on low incomes who are losing their houses because of rapaciousness, but for the ignorant masses with myopia of foresight... I hope they lose everything and come down to Earth with a massive crash!

They have destroyed the country I live in and now I'm saving to leave it and live in South America where people are more social leaning and less concerned with their own greedy selves.

HauspocalypseNow said...

wait a minute what is this 'Austrailian dream' of which you write?!

Since the American Dream is dead can I borrow your Aussie Dream?

Sean Reynolds said...

HauspocalypseNow said...
wait a minute what is this 'Austrailian dream' of which you write?!

Since the American Dream is dead can I borrow your Aussie Dream?

Unfortunately, they both expired at about the same time, in a bizarre double accident apparently also involving a clutch of baby boomers, landlords, bankers, and some unidentified 'eco-rats' in suits. Such is the social settlement in Anglo-American countries, alas.

Anonymous said...

Sean - the comment from Mike Berry was a good one. I have been writing to politicians at all levels and on all sides. My message has been something like this (as yet, no meaningful replies - they are either stupid or too busy furthering their own careers to care) ...


House prices rising is a BAD thing. People think I'm nuts when I say this but isn't it bloody obvious. There are 2 possible scenarios moving forward:

1) The incredible rise in house prices is permanent and eventually it will feed through to everybody's cost of living - it will flow into rents and it will flow into owner occupiers costs as houses turn over in the market - and this will make the country POORER! Something everybody needs has gone up in price and other spending must drop.

2) The incredible rise in price is temporary due to land release constraints or possibly a debt fueled asset bubble (or both), which means in time it will correct. And if this happens we are on a road to economic chaos as people have borrowed enormous amounts against the so called 'value' in their homes.

So, this is the biggest economic problem of our time - it is staring you in the face - but you ignore it. What the hell is wrong with you?

Contrarian Investors' Journal said...

The root of this "selfish, rapacious greed" is monetary inflation (i.e. 'printing' of money) under the global fiat currency system (see How to secretly rob the people with monetary inflation?).

If you notice, property prices had been skyrocketing in the US (now already deflating), UK (starting to deflate), China, Singapore, Australia.

Worse still, it not only property that is skyrocketing. Stocks, bonds , commodities, oil, gold and even art are in a bull market (see Epic, unprecedented inflation).

All these bull market gives people the illusion of economic prosperity. In reality, it is masking the mal-investments, excesses and dangerous debt bubbles underneath.

In other words, it is back to the 1920s again. Most economists and analyst alive today are not even born yet in the 1920s and thus, not understanding that the same mistakes are being committed again.

Anonymous said...

Here, here, I certainly agree there is something seriously wrong with fundamentals & people have turned owning homes into a kind of business....remove negative gearing I say, that would be the first step....
My brother alone owns 4 properties & I have other friends that have more than one, also....It angers me, because I am a single income earner, on the average $50,000 per annum, working two jobs....
I have no hope competing with these types of people & just the other day someone made a comment to me which made me feel like a second class citizen!....that was... "oh, you are JUST renting aren't you"?....
While they all gloated about how many properties they owned, the said person, only got where she was through a divorce & took her ex for all that she could!!!...
People are so ignorant & greedy.....Oh & by the way I felt like retaliating to this young woman & saying, yes I am renting & without people like me, people like you wouldn't be able to cover your mortgage payments & have a so called investment property, now would you?, but I held my tounge!....
Let's hope some equality comes back into this society we live in, because it is sadly turning into a case of rich & poor, haves & have nots & I for one am so upset & disheartened about it...
I deserve to own a home just like anyone else.....
People, we need to wake up, stop paying ridiculous prices for homes & start writing letters to current affairs shows, radio programs, government offices, whoever will listen basically, to see if as a collective group we can't start to fix this problem....If we all work together maybe we can enforce a change....Bring on the price crash, it's long overdue & inevitably going to happen....

Best wishes to you all....C

Avfah said...

Government has failed, you well point out. One thing that needs to be done is for people to vote more clearly in favour of effective government policy. To this end I have established

to help fight this problem from a grassroots level.

Steve said...

It'd be great if you could do a post about the CPI and the items removed etc. I was recently in the UK for 2.5 years. I really noticed the damage of inflation on prices when I returned.

In the UK they have the RPI in addition to the CPI which is supposed to be a better measure of "true inflation". It's usually about 2% above the CPI.

potential fho said...

Most direct way to make housing affordable is to lodge a letter to Treasury outling discrimination of tax system (makes them create a file for every complaint - no need to use your real name).

Treasury is responsible for tax discrimination against home buyers. Treasury has the power to end investor advantage.

Also, I like your recommendations. The recent (June 2008) Senate report Housing Affordability had a similar listing, very comprehensive and fair.

The govt has to get over itself and stop being the Nanny State for investors.

Investors can claim a tax deduction on Loan Interest generated by property debt

FHO / HO cannot claim Loan Interest deduction on residential property

Investors have tax advantage in common market of residential property purchase

Until this anti-competitive tax ruling is addressed unfair advantage will continue

Responsibility rests with Treasury to correct the situation

Allowing investors, but not FHO or Home Owners, to claim Loan Interest deduction is


Mia said...

Anonymous said...

Post date is 31 December 2008?!

daniel said...

Hi Sean

I know this is slightly off topic, but there is a bailout happening right now under our noses for the gamblers.

I object in the strongest possible terms to wasting my tax dollars to pay the gambling debts of our own sub prime lenders in an attempt to keep the bubble going for just one more electoral term.

I'm trying to get people writing and shouting here:

all the best, keep up the fight


justuploaded said...

Most of my friends and work mates dont think or want to believe that Australia is in a huge housing price bubble at the moment. I suppose its due to the fact they just "bought into" the market.

Of course the government is in panic mode at the moment,they will try to prop the leaning tower of realestate. Well they are the major players in this game-gamble.

Thanks to the people over at global house price crash that opened my eyes to the huge housing bubble.