The International Monetary Fund (IMF) recently reported Australia has, based on price to income ratio, the third most overvalued property market in quarter 4, 2013. Since then, according to the Australian Financial Review, we have leap frogged Canada to take second place honours, behind Belgium who has honours as the most expensive property market.
While economic reports both within Australia and abroad continue to ring warnings that housing is becoming a significant source of systemic risk for Australia (Think of what happened in the United States, Spain, Ireland, Greece etc), our politicians are quickly devising ways to make our bubble even bigger and far more dangerous. This had caused speculation that it is actually our politicians driving this bubble for their own personal greed.
Monday week, during a Senate Economics References Committee hearing in Adelaide, Senator Nick Xenophon said rules should be changed to allow first home buyers to dip into their super to help pay for a home. He said such a scheme was operating in Canada (remember they had the 2nd largest housing bubble, until we took that rank) allowing access up to $25,000 and it has lead to improved housing affordability.
“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Xenophon said.
Everyone knows if you introduce – say a $7k First Home Buyers Grant, prices rapidly increase by $7k and any benefit of the grant is quickly eroded (until the next grant is announced…). Allowing Australian first home buyers to access $25k from their Superannuation accounts to fund a leveraged purchase into our property bubble will only help thrust property prices up another $25k. So why would you suggest such a ludicrous idea, let alone announce he will submit a bill into a spring session of Federal Parliament?
Australia’s property bubble is now quite a bit larger than the one the United States experienced at the height of 2008. One of the reasons for this has been the multiple government incentives the government comes out with when the market exhibits signs of collapse (50% capital gains discounts, First Home Buyers’ Grants (FHOG), First Home Buyers’ Boosts (FHOB), allowing practically unrestricted foreign investment etc – and that is on top of negative gearing and other tax distortions.) For example, Treasury executive minutes stated the FHOB was “short-term stimulus [..] designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.” – You can’t get more honest than that!
One of the most recent changes, in September 2007, has been allowing Self Managed Super Funds (SMSFs) the ability to leverage up into our property bubble, throwing good retirement funds after bad into speculative markets seasoned with quite a bit of gearing.
From a politicians point of view, this legislation has been extremely successfully. There is currently no shortage of potentially naive property investors jumping head first into the market and keeping a floor under property prices. From the view of the regulator, there is significant cause for concern. A review by the Australian Securities and Investments Commission (ASIC) found only 1 percent (yes, one percent) of SMSFs were getting “good” advice about leveraged property investment. It’s no wonder when most of this information is spruiked during high pressure property seminars. For an increasing number of Super Fund’s investing in property, it has been an unmitigated disaster with some funds losing 75% in less than two years.
Superannuation savings is seen by politicians as a good source of funds to keep the bubble inflated and staving off collapse. But one has to question the long term effects? Not only could individuals lose a significant portion of wealth stored in homes and investment properties, they could also see reduced retirement savings.
Senator Nick Xenophon’s suggestion to improve housing affordability (or make it worse depending on where you stand) has been ridiculed by thousands of Australians over the past two weeks. But it is also drawing International attention – all the way from Canada. Garth Turner from The Greater Fool even suggests Nick needs a “better research assistant.” Turner goes on to write:
Now, Nick, we’re reaping the bitter harvest sown when that dumbass legislation passed. Allowing first-time buyers to remove tax-free money to buy a modest home they could not otherwise afford, then restore it to their long-term retirement savings makes perfect sense in theory. In practice and experience, just the opposite.
To date the HBP [Home Buyers’ Plan] has been used about 2.5 million times, with roughly $30 billion removed from savings and investments and plowed into real estate. When combined with dirt-cheap mortgage rates (I notice Aussie banks just slashed five-year rates to an all-time low) and voracious, carnivorous bankers, it’s helped push home prices into the clouds. The cost of an average detached house in two of our major cities now exceeds $1 million. (I see median home prices in Sydney rocketed 17% in the past year, to $812,000. So you know what I mean.)
In other words, if you think letting people steal money from their financial futures in order to buy houses today which they really can’t afford is going to make real estate more affordable, you’ve been spending too many evenings with the goat. The opposite is probable. In Canada, it’s fact.
So maybe Xenophon just made an honest mistake and didn’t do thorough homework before proposing this idea?
Aussie Politicians and their $300 Million Property Portfolio
Earlier this week, research surfaced on our politicians and their sizeable investment portfolios. In an article titled The Propertied Federal Political Class, the authors write:
The public should ask “Are the property holdings of our federal politicians negatively influencing policy and causing them to ignore evidence?”
It’s a very good question.
Their comprehensive research show 226 members in both houses of parliament with an ownership stake in a total of 563 properties – an average of 2.5 properties per member.
The news spread like a virus, with Fairfax later picking up the story, The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices
Oh and Xenophon I hear you ask? He owns just eight….
» Nick Xenophon Wants The Rules Changed So Young Home Buyers Can Use Retirement Savings – Business Insider, 28th July 2014.
» Nick Xenophon’s Idea To Let First Home Onwers Access Super To Buy A House Is Misguided Helpfulness – Business Insider, 29th July 2014.
» Nick Xenophon’s dangerous idea on housing – Herald Sun, 9th August 2014.
» No kidding – The Greater Fool (Garth Turner), 6th August 2014.
» The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices – The Sydney Morning Herald, 6th August 2014.
» Garth Turner hammers Nick Xenophon – Macrobusiness, 7th August 2014.
» Aussie politicians’ $300m property portfolio – Macrobusiness, 6th August 2014.
» Investors face big losses when the honeymoon is over – The Sydney Morning Herald, 18th July 2014.
Admin,
Thank you for the insightful analysis and the evidence cited.
For years I have been wondering why OZ has been ruled by a group of illiterate lunertics over housing issues. However, they are not.
Systematically the country is kidnapped by greedy liers, even RBA governer is one of them. Negative gearing, recently suggested itself to me as a hedging tool for speculators. If they win, they enjoy discounted capital gain tax. If they lose, they are compensated by NG. Then the country is doomed to crash to hell.
Our lawmakers are vested real estate speculators! What a shame! The gang is runing the country for their own benefit! This answers too many misteries in OZ, which is the territory of wicked evil wizards and witches…
I notice that Nick Xenephon owns 9 properties.
I’ve no doubt that property is hideously over-valued. I’ve been watching from the wings
for about 4 years now, and the ability of governments to keep this things levitating is quite extraordinary. The advice of colleagues to get in a year or so ago when things were looking like dropping, was vindicated when interest rates dropped, and prices rose.
Vested interests…interesting idea…and its true that most people I know have a vested interest in property. Its not wilful dishonesty, but they have been brought up on the idea that you try to make yourself better through responsible investment, and they don’t seem to get the idea that all this easy credit is a bad thing. I guess I have a vested interest also…in property dropping because I’ve been locked out for so long. Maybe I’m missing something.
Property….siggghhhhh…..its all getting a bit boring isn’t it. Being middle class, having children….I’ve become increasingly more myopic and self interested as time goes on and I suspect that happens to everyone. Meanwhile carbon di oxide keeps being belched out into the atmosphere with our own personal furnaces on wheels, the world and climate is slipping beneath our feet, and the world becomes a less hospitable, more biologically impoverished place to live in everyday.
I want this housing bubble to implode on itself.
one day may be able to afford a home and live within my means.
I wonder if politicians really think that owning property is a long term investment strategy or if they think they will be able to extract themselves before the implosion. Scheme after scheme that they dream up to keep things going would suggest that they do know that the situation is dire.
But maybe they will implement a debt jubilee thus saving themselves and all of the speculators while wiping out all of the savers and superannuation funds. Either way there are going to be a lot of angry people.
I have a theory about the political economy. Economic collapses (in recent times at least) always occur at the end of political cycle. That is politicians will do anything to keep the economic bubbles going until the end of the political cycle (around elections), when they know that they’ve lost all support for their policies.
You only have to look at the recent history in the US – the dotcom bust at the end of Clinton’s presidency and the housing bust at the end of Bush’s presidency. I have a feeling that something similar will happen just before or just after Obama leaves the White House.
In Australia the cycle has been much longer but the same dynamics are playing out. Both major parties are on the nose and even the populist independents are starting to smell.
Excellent article. Congratulations on changing the focus of many of Australia’s economic and social problems to one of the sources and that is corrupt Politicians. Future articles should also mention the main culprit and that is the voter themselves. Nick Xenophon is just expressing what most politicians do and that is to shamelessly express their ‘elitist’ views’. He will not be the first nor last politician who has no principles because if he had he would have resigned in shame for his statements. I hope his voters will now see him and all politicians for who they truly are and that is a corrupt force that is a danger to Australia’s well being.
@ millimouse
The wicked evil wizards and witch realm is coming to an end.
the responsibility of outing them is up to people like you and I (us).
all we have to do is turn our back on them.
no occupy. unoccupy
prepper
Ordinarily, you’d think the bubble was ripe for the bursting. In fact, over-ripe. But now we have an unprecedented paradigm – unrestricted foreign investment, which was touched on in the article. With so many cashed-up Chinese investors looking for somewhere to park their money, and with much of this money being corrupt – remember, China is still a communist country and bribes and corruption are the order of the day – Australia seems to be the country of choice. The best part of it (for the Chinese) is that we do not question the origin of the money, how it was obtained, whether it is used legally or not; the only important thing for Australia is that it props up and further inflates the housing bubble.
My fear is that Australia could well have a fairly significant proportion of the population priced out of property because of foreign investment here, yet the bubble may not pop because there are just so many foreign investors able and willing to push prices ever higher. This is all good for politicians who already have property portfolios so why should they want to change anything?
These are interesting times indeed. It seems Australia learned nothing from the GFC. In fact it seems we are determined to up the damage done by the USA to itself.
We have borrowed far beyond what the USA citizens did.
We already have a blood bath in small business.
Big business is even failing.
Mining service companies falling over (wasn’t it meant to be a hundred year boom?).
Unemployment is exponential.
It goes on and on, yet we still encourage loan to asset ratios as low as 3% officially (so, with the number fudging out there, you know people are borrowing beyond asset values, in the midst of the craziest bull market seen in Australian housing).
At the end of this (and I’ve said it before)
The people will blame:
Politicians
Banks
Foreign cash
RBA
Asylum seekers
etc, etc
Anyone, but themselves.
I would love to know what other assets the pollies are holding. I would bet on other non-cash assets, ie:
Gold, silver & other PMs
Art
Defensive industries/business
And other asset classes that don’t show on the books. So, the name of the game is to make the largest sector of the population FEEL richer….If it pops, well, meh. They have their non-currency assets that will likely rise in value in economic turmoil.
So, yes. The pro-property group can sit there pointing at me saying “It’s only sour grapes you didn’t get on the housing ride”. No, not really I’ll say. Look at Detroit, look at Japan, in fact look most places where a housing bubble burst properly and you will see the devastation that occurs after.
Say, did you know that only 30% of metropolitan Detroit is inhabited…But that’s Detroit you say.
Ok, what about Tokyo? Did you know that in some parts of Tokyo 1 in three houses are vacant…..Unable to be rented or sold at any price?
Interesting times. I ain’t joining the pro-property crew under any circumstances. Why would I? The interest on our money pays the rent. We can afford to do pretty much what we want, when we want and where we want…Yet, my “aspiring landlord” friends can’t afford air fares for family birthdays….Can’t afford to pay their tax obligations wholly and on time….Can’t afford to say no to any overtime….. Hell, some can’t afford to eat properly. Some are working full time jobs, plus part time, plus illegally performing cash work from home….They have 0% freedom, & I can not convince them on any level that it is the property and their debt load that’s killing them. It’s a religion.
Admin says property ownership was scam of the century. I think the currency system is THE scam of the century, but property ownership is a damn close 2nd.
I have been wondering why the house prices keeps going up, double digits in some places in a year and keep going up. It doesn’t make sense. It is no good for the country when billions are invested in housing that produces nothing. It should be encouraged to invest in industry that produces goods and employment.
But now understand, from this article that explains well. Our politicians are no different from politicians from third world countries where most of them are corrupted. But our politicians are legally corrupted and short sighted by making laws that serves their own interests.
I am sick of them; both major parties are the same.
Who should we vote for when both major parties are the same…
^Yep.
That’s why until we have a poltical party that is focused on affordable housing this problem will continue.
If you vote in an election for the Australian Government you are aiding and abetting in a crime.
We have a constitution for the Commonwealth of Australia not Australian Government registered as a corporation in Washington.
What The FUQ – Frequently Unanswered Questions of the “Australian Government”
http://truth-now.net/customs/
video down the bottom of the page tells all
prepper
@9 & 10
I don’t want to come across as a right wing loony, but I’d rather flexible workplace laws regarding employment when SHTF.
We live in an increasingly global world: We are all aware of this. Those with capital (both monetary and intellectual) can move local with ease.
Therefore I ask: Do we want to be like France when SHTF? 75% income tax rate? 30hr work week? laws making it illegal to email out of business hours?
Have you seen what’s going on in France? Massive capital flight:- Cash and intellectual capital are leaving in droves. How do you repair an economy when there is no capital and no skills?
@Matty
I agree with your thinking on housing ownership however you should be aware that the coming G20 meeting in Brisbane chaired by our treasurer will ratify the Bail In proposal of member nations. So when the house of cards collapses you will be an unsecured creditor of the financial institution you are with. Cyprus style you could receive worthless shares in exchange for your deposited funds, and the $100,000 Government Guarantee could be released in a time frame chosen by them. Big hollow mattresses will be looking very attractive after September this year.
Lol what’s the incentive for them to remove all the grants and tax breaks? Stop the unlimited Chinese investment fleeing china’s collapse. Or increasing land supply. 90% of the people who vote own property. It’s a business and the constituents are the shareholders. Why would they ever ever ever do anything or not do everything in their power to protect it…
BHP and Rio both slowed down production and then started stockpiling iron when it looked like there was an oversupply to keep prices nice and high…
The Australian government has constricted land supply in a country with infinite land while at the same time offering discounts to anyone who buys into the existing system.
I may only be a simple mule farmer but I know somethings wrong when 50k in cement magically becomes worth 1 million and the people who own the most are telling everyone don’t worry… we’ll let you access your super to keep buying it. When you’re old and grey and can’t afford medicine or food because inflation has killed your super at least you have a roof over your head…
@md, that foreign investment is extremely fickle stuff, especially when the investors don’t live here and have no connection to the place, so don’t be surprised if all of a sudden they decide to up and leave town at the drop of a hat. It happened in the Gold Coast a few years back with the Japanese remember!
@ben, I asked that last federal election (I even asked here!) and never got a response. From what I could ascertain there is precisely no politician who represents my view, and especially those on property. In fact I don’t want to vote for a party or politician at all, I wan’t to vote directly on the issues myself.
Unfortunately, you wont get a political party with any strength that want ‘cheap’ housing while we have a fiat, fractional reserve currency system.
For our economy to grow we need one/either or both of the following:
1: Cash pouring into Australia
2: Ever increasing levels of debt
Now, 1 is practically dead/done/finished, yes we have mining, but we have no exports, farmings bleeding, manufacturing dead and any entrepreneur with ambitions has left for USA/China/UK. So, we can forget ‘sustainably’ increasing our income. (But cash to buy houses/farms/industry is pouring into Australia, all without being regulated properly)
2: Ever increasing levels of debt: This is easy!
Allow banks to charge 20+% on credit cards.
Allow people to borrow beyond asset values.
Allow people to buy cars on 1.5% finance (with a massive balloon payment at the end that is > the value of the car).
Allow peoples largest purchase (their home) to be funded by debt, then borrow again for loss making investment properties ( The ‘smart’ guys call it Negative Gearing)
So, until there is something that can increase credit growth like housing finance we will be on the same merry go round.
@14 Cui Bono
I hear what your saying: It’s a horrible situation, but I’m not getting caught holding collapsing property while tied up with finance : I don’t need finance anymore, but even then. If the bank take 10% of my holdings, that’s more than likely less than the collapse in my mates property values. Cash (sorry money) in the hand will be an impressive thing in a few years. Besides I’m not sure how much more of this rot we can take. If I can cash out my business the world is my oyster….Interesting thought.
@Chockolate
Quite agree we should be able to vote on major issues like defence, immigration, taxation etc as they do in Switzerland. If you can have secure internet banking you can have secure online voting.
@Chockolate
I currently have my business for sale.
@Cui Bono
I don’t know about secure online voting. our local CBA has issues with its secure system almost weekly
How could you ever go back and check all the votes if there is back door built into the secure system.
http://investmentwatchblog.com/leaked-german-government-warns-key-entities-not-to-use-windows-8-links-the-nsa/
prepper
@Paul
I get your point on the security of online voting. However I am not impressed by the current system that requires no ID proof and makes you write on your voting form in pencil.
@Cui Bono,
Yep it’s not the best system.
But please don’t cast your vote to reinstate a corporation registered in Washington
http://truth-now.net/apparent-failure-to-vote/
https://www.youtube.com/watch?v=BfYazDsFMPU
On voting day if you are able to find a voting booth for the election of Government of the Commonwealth you could take a pen.
prepper
Love your work, and beat me to it in many ways! I’ve created a petition to Senator Nick Xenophon: Scrap your super funds for housing plan, it’s a con-job…
http://www.change.org/en-GB/petitions/senator-nick-xenophon-scrap-your-dangerous-and-self-serving-plans-for-first-home-buyers-to-use-superannuation-for-housing-deposits-and-instead-push-for-the-real-solutions-to-housing-affordability
Concerning who to vote for, thought this might be of interest with everyone disillusioned with 2 party politics that both are essentially the same year in and year out.
Have a look at this video,
https://www.youtube.com/watch?v=fg0_Vhldz-8
Explains Liquid Democracy, essentially using technology to get back to how the ancients in Greece did it 🙂
lots of things still to fall in place but a very interesting and powerfull idea if it can be implemented. I would think using the Blockchain ledger (see bitcoin) that is open and transparent married with Liquid democracy is a future option. Giving the people a chance to vote on every issue and not once every 3 years, let the masses decide (good luck to lobbyist buying everyone out) but propaganda will always be an tool.
Lots to happen but one of the reason why bitcoin protocol that was invented has got so many applications/uses, ie, compare it to the internet during the 90’s. We didn’t know what to do with it yet….
By law I need to vote. I voted “for all” because they are all equally bad boys, no one is better than the other. 🙂
I’ve been following the threads here for the better part of 7 years and it’s always been my view that the key to the bubble bursting was employment. However I’ve been watching unemployment creep up and creep up over the past few years but house prices keep going up!
“Juwai.com, the leading broker connecting Chinese buyers with overseas property, estimates that 63 million Chinese are rich enough to buy property abroad”
The Chinese middle-class are hedging their bets and buying out here in Aus
“National Australia Bank’s senior property economist, Robert De Iure, said foreigners purchased 11 per cent of new properties and 6.5 per cent of established homes last year. Investment had doubled in the past two years.”
“Chinese buyers poured $5.9bn into property investment last financial year, topping the list of foreign buyers.”
And we wonder why property in Sydney has gone up 15% in 12 months. Do you think we need the RBA to investigate this??
From the AFR, Ausin Group, which offers property and mortgage broking in Australia to Chinese buyers
“, first set up Ausin in 2009, banks would only finance developments where less than 30 per cent was sold to overseas buyers, he said.
“Now, that’s up to 100 per cent in some cases,” he said.”
Between this and the recent article highlighting the significant conflict on interest with politicians / policy makers (negative gearing) – now we know why it’s a sacred cow, the banks (addicted to mortgage lending) and real estate spruikers, the building industry and the size (very small) and attractiveness of the Aussie property market….
I have a strong feeling we may not see a major property correction for a very very long time!
@Free Willy. I think how it plays out will be interesting. Unemployment is starting to surge and with structural issues in our economy (housing bubble), it will continue to head north, I think, at an increasing pace.
With mass unemployment, the government is going to have to start putting in plans to deal with the civil unrest and riots. You wonder if these Chinese will then want to buy property in Australia when there is so much civil unrest, or if their properties could be looted (high unemployment) or fire bombed during a riot?
I don’t think Australia would be my destination of choice then….
@Matt Ellis
I just signed your petition. Thanks for starting it.
@Joshua
If unemployment jumps they will allow people “unfettered access” to their Super in order to kick the can down the road. Like that moron xenophon wanting to allow access to Super in order for people to be able to buy property.
The building industry is the second largest employer in Australia. With interest rates now at historic lows (again) the building industry is going nuts. In my area alone there are no less than 30 blocks of units going up (from 20 odd units in a block up to large multistory e.g. 6-7 floors 50-60 units ).
It’s crazy! Most of them have been bought off plan!
And if all this fails it probably doesn’t matter because 30% of all property is probably being bought by foreigners in which case local employment has much less influence on property value.
I mean the first home buyers have all but vanished a long time a go and it didn’t even register as a blip on the house price radar.
Property is ultimately a self defeating from a wealth generating perspective as no real long lasting value is created. The ‘value’ created is illusory and transitory as many in the US, Ireland, Spain, etc, have found out when the property bubbles of those countries bust and the ‘paper’ value evaporated. The bubble may grow for a long time but in the end it will pop.
Here in Australia the debt mountain will implode upon itself as much of the private debt (one of the highest in the world as a percentage of GDP) is interlinked – people have borrowed to invest in property, borrowed against their home to buy property, borrowed against their home to support their business, borrowed from their home to pay down credit card debt….then there are people using their super to buy property. The vast majority of recent ‘investors’ appear to be speculators.
The current and previous governments along with multiple institutions (banks, constructors, etc) have colluded to create a highly distorted Frankenstein of an economy where over 60% of national assets are property. This means that only 40% can be considered productive assets. In the US 14% of assets are property and in the UK it is around 20%. On top of this over 50% of Australia’s economy is finance/services as the economy hardly produces high quality goods that can be traded.