On re-reading the quote I see that it is definitely false. It states "THE exceptions....". Those are not "THE" exceptions, they are only three of the exceptions. There are many more. Another issue with the quote is that it uses the inappropriate emotive term "illegal". My OP is correct. Many countries allow negative gearing in the sense of allowing losses to be deducted from other income for tax purposes. The RBA found that 9 out of the 10 1st world countries (representing a huge proportion of the world's economy) it reported on allowed such deductions to be made against other income. It seems likely therefore that the part of the quote referring to "vast majority" is also false.
So you admit that you forgot it was you that actually did the quote and not myself as you mistakenly said in your earlier post .. Ok
Re reading his quoted comment again I will concede that the word "three" or "some" should have been in there, however that does not Make your OP correct, and since he did not use the word "only", i doube he intended to imply that these three countries were the only exceptions... None the less,. It means that both of you were in some error.
Him for forgetting the extra words (sloppy work) (or omitting them in complete error of fact), and you for Assuming that the report was an accurate reflection of the whole worlds countries... It is not, and the RBA paper is not powered to prove it for you..
I can cite a list of 9 out of 10 names that start with the letter A, that does not mean the vast majority of names in the world start. With an A, nor does it disproove it.
So there you go..
As for the 'illegal' word.. It is not emotive is it ?
If I break the tax laws of any country i am doing somthing illegal am i not ? So if the tax lwas do not allow me to claim a benifit and I do it regardless, i am deemed to be breaking the law no ?
Firstly let me just say, that my views on replacement cost are certainly not uniform across the entire Australian market.
There is no doubt the big price increases in Melbourne and Perth (versus say Sydney) has ensured very healthy development margins in those markets. This is the main reason why supply is surging (and did surge) in Melbourne and Perth.
Look at the developers in Perth. Finbar, for example, is generating +30% return on capital and trading at a significant premium to book value.
I’m a Sydney person so I guess most of my commentary relates to that market. That is, if marginal cost of production = $500-$550k and median house price is $630k (in a medina location), the downside in Sydney looks limited. I am far less confident of the same “floor” in Perth or Melbourne.
But you raise an interesting point in terms of high end real estate (+$1m). With this I am torn between my gut feel (market will fall) and my MMT upbringing (market will rise). I’ll explain below.
The bear case for the $1m market is exactly what you have outlined. My sense is the +$1m is trading well above replacement cost. It is hard to measure because you can’t put a replacement cost figure on inner city land production since the exercise is purely theoretical. But from what I hear from the building Industry, margins are very good for the high end homes. So in that sense I think the +$1m homes could suffer a serious correction (in all markets).
The MMT side of the brain says the opposite. As you know, all money is backed by debt. That is, for every mortgage / loan there is a sister deposit. Now if you accept most debt (mortgages) occurs for FHB and the middle market, then the deposits (cash) is more prevalent at the top end of the market (ie: less mortgages). This means the top end is not likely to suffer from mortgage stress (of course there will always be isolated cases).
Maybe the answer lies in between. The top end may not crash, but will suffer years (decades?) of flat nominal / negative real growth.
There's nothing wrong at all with your MMT reasoning. But, I don't think that mortgage stress is the only factor that can make the market capitulate. I think it is possible for the mid-to-top end to capitulate without any mortgage stress at all.
If property prices falter for any decent period of time (as they have been in the past year across the country), the expectation of capital gains slowly begins to erode in investors' minds. Thus property quickly becomes a less attractive investment and a few PI's begin to pull out. In an oversupplied market (such as Melbourne or Perth) this contributes to high stock levels, making it harder to shift stock, thus lowering sentiment, which then lowers prices etc etc.
So really, there is no requirement of mortgage stress at the top end; all it requires is a shift in sentiment such that PI's don't believe capital gains exist at a desirable level. When/how this shift in sentiment reaches "tipping point" is hard to say.
Now that you mention MMT though, it's interesting to consider what effect the aimed budget surplus will have on house prices (and the economy generally). If you accept that surpluses remove money from the economy, then you must accept that this means the private sector will effectively have less to spend, since they must dis-save collectively. The only way to continue at the same consumption level is to turn to cheap credit.
The issue there isn't the banks ability to home lend - in any case, you've got the RBA creating funds and buying residential mortgage backed securities every day (they openly state it on the RBA website - since 2005 government bonds aren't the only thing that the RBA accepts in it's daily interest rate targeting operations - it also accepts high quality RMBS).
But I don't think the private sector is able to take on any significantly higher amoutns of credit, at least not without much lower interest rates to make up for the fact that (a) they are pretty highly leveraged at the moment (the private sector in general) and (b) they will be dissaving as the budget approaches surplus.
Ak4,
I forgot about this thread and just read your response.
You are of course quite correct to be concerned about the return to surplus and the impact it will have on savings. There is no doubt that the political environment is such that this will occur not matter which party is in governement.
Further, I accept your view that once the government returns to surplus, the private credit growth must resume to re-flate assets and the economy (in the absence of a current account surplus). I also accept private debt / GDP is very high and there is a serious question how much more capacity the private sector have to increase borrowings.
I have given these issue plenty of thought.
One observation I have made is that over the long run, central banks have no control over official cash rates. That is, as the Banking sector creates money via the credit process, and the consumer becomes more and more geared. This foreces central banks continue to lower interest rates to maintain aggregate demand. This is simply an extention of Minsky's argument. Sure in the short term rates may increase from time to time, but the long term trend is certain. ZIRP!!!! In other words, high official cash rates (OCR) reflects the contries capacity to take on more debt. A "debt speedometre" if you will.
If you accept this (not sure that you will), the next question is "If australia's private debt / gdp is as bad as the US, why are official cash rates higher?".
The answer lies in two areas 1. Wealth distribution and 2. Debt distribution
WEALTH DISTRIBUTION The level of wealth distribution is critical here. If you think about two extremes (wealth equally shared versus 1 person with all of the wealth) then there is a clear argument that when wealth is equally shared an economy can cope with higher private debt. This is because interest payments are paid by the same people who receive them. When wealth is unequally distributed (the USA is a good example) interest payments are made from the middle / lower class, to the wealthy. Since the wealth consume a much smaller % of income compared to the middle class, this crimps consumption - ironically, lowering return on capital for Industrialists, who then argue for a lower cost of priduction via lower wages. The outcome is a sprial of deflation.
This is where Steve Keen seems to get caught on his analysis. I have not read his blog for a while, but he seems to get caught on interest payaments and the impact on the dynamic economy. When you accept interest payments is simply more credit backed money, you understand wealth distribution is critical to the MMT / Minsky financial / economic instability hypothesis.
DEBT DISTRIBUTION This is a bit more obvious - if the higher income earners are carrying most of the levergage, then there is more room in the system for credit growth. The RBA has done some excellent work here showing the majority of the houshold debt is held by the top 40% of income earners. This is in stark contrast to the USA with the late cycle growth of sub-prime loans.
NOW BACK TO INTEREST RATES So official interest rates tell us alot about the private sectors capacity to take on more debt. In Australia, the fact wealth is more evenly distributed, and the debt is in "the right hands" tells me Australi does have more capacity to take on more private debt versus, say, the USA. This view is supported by the fact our debt speedometre (OCR) is still quite high.
This does not mean will will not have a "minsky moment" or a tipping point. It just means there is some time yet before it occurs.
As usual (and as a fellow MMT champion), I would be very interested in your views.
Topics: Press Releases Tags: a running list of warnings, affordability, boom-bust, FHOG, housing, housing affordability, land supply, speculation
Posted on Thursday, March 24th, 2011
Author: David Collyer Print This Post Print This Post
Some commentators have described Prosper Australia’s Buyers Strike as “irresponsible” because it threatens to disrupt the orderly market in real estate.
“These opinions should be greeted with howls of derisive laughter,” Buyers Strike campaigner David Collyer said today. “A market is made up of many competing views. To give oxygen only to some is a recipe for disaster.”
“Hundreds of thousands of potential first home buyers have privately done their sums and find they don’t add up. Prosper is merely giving them a much-needed voice.
“Two secure jobs and a good deposit are no longer enough to buy a home. Buyers must make a life-long vow of poverty as well.
“It is irresponsible to expect such a sacrifice,” Collyer said.
“Do not underestimate their anger and frustration at being denied land ownership and its civic benefits.”
“These commentators are saying the only views entitled to attention are from the property spruikers – the professional industry mouthpieces. Their mantra is of land shortages due to government restrictions, spiralling demand, and that all property deserves a premium because Australians live on the coast.
“They glide over the fact FHBs are priced out of the market by a national hysteria to invest in property. Without FHBs, second home buyers cannot trade up. The whole juggernaut grids to a halt.
Meanwhile, of the 1.75 million Australian taxpayers with rental income, 1.3 million only have a single rental property. The vast majority are both middle-income earners and are negatively geared. They are diverting all rents and part of their personal income to meet costs and interest payments. These assets are illiquid, highly geared and undiversified. Their investment strategy only works when prices rise faster than the interest cost. See here.
“Negatively geared taxpayers guarantee price falls will be extreme when they occur: all will want to bail out at the same time. Further, banks will require equity injections or will forcibly sell up heavily mortgaged properties that go underwater, that are valued at less than the loans they support.
“The message in our Buyers Strike is clear and simple. If FHBs refuse to buy at current outrageous prices, the market will correct.
Collyer reiterated that Prosper is not calling the bursting of the Great Australian Land Bubble, merely pointing out that it is ‘imminent’. ENDS
Meanwhile, of the 1.75 million Australian taxpayers with rental income, 1.3 million only have a single rental property. The vast majority are both middle-income earners and are negatively geared. They are diverting all rents and part of their personal income to meet costs and interest payments. These assets are illiquid, highly geared and undiversified. Their investment strategy only works when prices rise faster than the interest cost. See here.
That's about 1.299m people about to take it up the clacker
I honestly think that the NG debate has been done to death on this and other forums.
Not sure what the point is arguing with the pro-NG crowd - people are always trying to rationalise rent-seeking behaviour (in the economic sense) in altruistic terms.
If there was hypothetically speaking, concessional tax treatment for chairs, I can just see self-interested parties defending such a concession:
"The chair industry employs lots of Australians"
"Without a tax incentive for chairs, people would stand more or sit in inferior chairs. This would cause a lot of health problems and would cause a blowout in government subsidised medical costs"
I honestly think that the NG debate has been done to death on this and other forums.
Not sure what the point is arguing with the pro-NG crowd - people are always trying to rationalise rent-seeking behaviour (in the economic sense) in altruistic terms.
If there was hypothetically speaking, concessional tax treatment for chairs, I can just see self-interested parties defending such a concession:
"The chair industry employs lots of Australians"
"Without a tax incentive for chairs, people would stand more or sit in inferior chairs. This would cause a lot of health problems and would cause a blowout in government subsidised medical costs"
blah blah blah blah blah
The above post is a perfect example of the deceptive and false presentation of the negative gearing tax treatment debate where the current treatment is presented as a "concession". There is no concession. The negative gearing debate is about a selective demand by some in society for unfairly targeting a certain category of tax-payer – ie holders of income earning investments.
The natural tax law in Australia provides for individuals to be taxed on the basis of their whole income and their whole expenses. No quarantining appears in the basic tax law. Some people are requesting a special law for holders of income earning investments which will quarantine the income and expenses of those assets from other income and assets. It would be grossly discriminatory.
There is a recent law which already enforces some quarantining of assets which was introduced with the aim of dealing with the tax treatment of hobby type businesses. Rather than doing the job honestly and determining whether the activity really is a hobby, the law makes arbitrary parameters regarding the level of business to decide whether quarantining is to be enforced. Such law was required to over-rule the natural law in Australia which does not provide for quarantining.
Proponents of quarantining of income and expenditure, like BubbleBoy and McNamara, present their case in a totally false manner. They present their case in way that suggests that holders of income earning assets are treated in some especially preferential manner. BubbleBoy speaks of it being similar to a special tax treatment for chairs. That way of presenting the case is false and deceptive. Holders of income earning investments get no special treatment. There is no law which gives them special treatment. The normal tax law applies. BubbleBoy and his co-horts are demanding that a special law be introduced to treat them in a discriminatory manner. Such a law was introduced in 1985 and then scrapped in 1987.
The whole manner of the presentation of the ban-negative gearing case is dishonest. It is presented as if there is a special law and privilege given to holders of income earning assets. There is no such law. They are treated exactly like everyone else (apart from those deemed to be running a business as a hobby). It is the ban-negative gearing lobby who are asking for a new law to enforce discrimination. As I have written before, negative gearing (holding a loss making investment) cannot be banned. But the ban lobby don't actually want negative gearing banned – they want the introduction of a discriminatory tax law to enforce quarantining for which the natural tax law of Australia does not provide. Non-quarantining is not a "concession". It is the basic taxation law of Australia.
I forgot about this thread and just read your response.
You are of course quite correct to be concerned about the return to surplus and the impact it will have on savings. There is no doubt that the political environment is such that this will occur not matter which party is in governement.
Further, I accept your view that once the government returns to surplus, the private credit growth must resume to re-flate assets and the economy (in the absence of a current account surplus). I also accept private debt / GDP is very high and there is a serious question how much more capacity the private sector have to increase borrowings.
I have given these issue plenty of thought.
One observation I have made is that over the long run, central banks have no control over official cash rates. That is, as the Banking sector creates money via the credit process, and the consumer becomes more and more geared. This foreces central banks continue to lower interest rates to maintain aggregate demand. This is simply an extention of Minsky's argument. Sure in the short term rates may increase from time to time, but the long term trend is certain. ZIRP!!!! In other words, high official cash rates (OCR) reflects the contries capacity to take on more debt. A "debt speedometre" if you will.
If you accept this (not sure that you will), the next question is "If australia's private debt / gdp is as bad as the US, why are official cash rates higher?".
The answer lies in two areas 1. Wealth distribution and 2. Debt distribution
WEALTH DISTRIBUTION The level of wealth distribution is critical here. If you think about two extremes (wealth equally shared versus 1 person with all of the wealth) then there is a clear argument that when wealth is equally shared an economy can cope with higher private debt. This is because interest payments are paid by the same people who receive them. When wealth is unequally distributed (the USA is a good example) interest payments are made from the middle / lower class, to the wealthy. Since the wealth consume a much smaller % of income compared to the middle class, this crimps consumption - ironically, lowering return on capital for Industrialists, who then argue for a lower cost of priduction via lower wages. The outcome is a sprial of deflation.
This is where Steve Keen seems to get caught on his analysis. I have not read his blog for a while, but he seems to get caught on interest payaments and the impact on the dynamic economy. When you accept interest payments is simply more credit backed money, you understand wealth distribution is critical to the MMT / Minsky financial / economic instability hypothesis.
DEBT DISTRIBUTION This is a bit more obvious - if the higher income earners are carrying most of the levergage, then there is more room in the system for credit growth. The RBA has done some excellent work here showing the majority of the houshold debt is held by the top 40% of income earners. This is in stark contrast to the USA with the late cycle growth of sub-prime loans.
NOW BACK TO INTEREST RATES So official interest rates tell us alot about the private sectors capacity to take on more debt. In Australia, the fact wealth is more evenly distributed, and the debt is in "the right hands" tells me Australi does have more capacity to take on more private debt versus, say, the USA. This view is supported by the fact our debt speedometre (OCR) is still quite high.
This does not mean will will not have a "minsky moment" or a tipping point. It just means there is some time yet before it occurs.
As usual (and as a fellow MMT champion), I would be very interested in your views.
Thankyou for your very interesting post.
Again - no arguments about the technical side your ZIRP observation. I think you are spot on. As I said in my original post, the only way that spending patterns can be "buffered" against the upcoming surplus is through lower interest rates. Economically speaking, it is not only possible, it is necessary.
It is at this point that I insert a caveat - will the RBA follow that line of thought? Your argument is that a high level of gearing "forces central banks continue to lower interest rates to maintain aggregate demand". I'm not convinced that the RBA favours aggregate demand over stable inflation. They did, after all, push up interest rates in 2010 in the face of a recovering economy and a highly unstable global one, causing GDP to grind to a halt. They did even worse in 2007-08 pre-GFC. Inflation, as always, seems to be the focus - unecessarily, because I doubt that food and energy prices are sensitive to monetary policy.
So in a nutshell, my point is: sometimes, political considerations sometimes trump economic ones, despite how logical or necessary they may be. I suppose we shall see.
What I found particularly interesting about your post, though, was your comments about distribution. Very insightful. I have given a bit of thought to distributional issues when it comes to production. I was having a debate yesterday with a man who was hell-bent on arguing that we should never be worried about distributional issues because to do anything at all about it causes deadweight loss and therefore is bad - and similar Microeconomics 101 arguments. After giving it some thought, I argued that wealth distribution certainly is important because
(a) at the household level, the propensity to consume decreases (proportionately) as income rises, leading to reduced consumption at the macro level (b) if we accept that capital and labour generally exhibit diminishing marginal returns, then it makes sense, where an output gap exists, to distribute towards underutilised capital/labour
Anyway, I won't take this too far off topic - what I wanted to say is that I certainly accept your point about credit distribution - it is a very logical point about distributional issues in the modern economy.
So ultimately, I agree on the economics. There is certainly capacity in the Australian economy for additonal credit issuance. The political considerations that constrain this are
1) As above - what will the RBA do? (My answer: probably fail to lower interest rates enough - going on their current indications and past performance) 2) Will good sentiment continue to drive appetite for credit in order to invest in property? Difficult to answer, and depends on the city, and its supply factors. 3) How damaging does the government/future government plan to be with its push for surplus? Will we see a repeat of what is happening in the U.K at the moment with a vicious austerity-deterioration cycle? Australian politicians certainly like taking their cues from the motherland every now and then.
The above post is a perfect example of the deceptive and false presentation of the negative gearing tax treatment debate where the current treatment is presented as a "concession". There is no concession. The negative gearing debate is about a selective demand by some in society for unfairly targeting a certain category of tax-payer – ie holders of income earning investments.
The natural tax law in Australia provides for individuals to be taxed on the basis of their whole income and their whole expenses. No quarantining appears in the basic tax law. Some people are requesting a special law for holders of income earning investments which will quarantine the income and expenses of those assets from other income and assets. It would be grossly discriminatory.
There is a recent law which already enforces some quarantining of assets which was introduced with the aim of dealing with the tax treatment of hobby type businesses. Rather than doing the job honestly and determining whether the activity really is a hobby, the law makes arbitrary parameters regarding the level of business to decide whether quarantining is to be enforced. Such law was required to over-rule the natural law in Australia which does not provide for quarantining.
Proponents of quarantining of income and expenditure, like BubbleBoy and McNamara, present their case in a totally false manner. They present their case in way that suggests that holders of income earning assets are treated in some especially preferential manner. BubbleBoy speaks of it being similar to a special tax treatment for chairs. That way of presenting the case is false and deceptive. Holders of income earning investments get no special treatment. There is no law which gives them special treatment. The normal tax law applies. BubbleBoy and his co-horts are demanding that a special law be introduced to treat them in a discriminatory manner. Such a law was introduced in 1985 and then scrapped in 1987.
The whole manner of the presentation of the ban-negative gearing case is dishonest. It is presented as if there is a special law and privilege given to holders of income earning assets. There is no such law. They are treated exactly like everyone else (apart from those deemed to be running a business as a hobby). It is the ban-negative gearing lobby who are asking for a new law to enforce discrimination. As I have written before, negative gearing (holding a loss making investment) cannot be banned. But the ban lobby don't actually want negative gearing banned – they want the introduction of a discriminatory tax law to enforce quarantining for which the natural tax law of Australia does not provide. Non-quarantining is not a "concession". It is the basic taxation law of Australia.
while you argue the case for -ve gearing with the rule of australian law well, what on earth makes you think that the australian tax system is perfect ?
The debate on -ve gearing for IP's is not isolated in Australia... it has been done in other countries (as you well know) and those countries have seen fit to place significant limits/restrictions on what people can claim against their other income streams.
Despite your claims that many other countries have -ve gearing, it is not the same kind of -ve gearing as Australia, and it is a complete lie to attempt to avoid openly accepting that fact.
So.. yes, the Australian taxation law currently is not in the practice of quarantining -ve gearing losses ... big deal... other countries have seen fit to do it and the Australian Government has every right to reconsider it.
The debate should be more if it is a wise direction to head, not if it is available in Australia... that latter question is obviously known.
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