November 11, 2009

No Magic Escape For Australia

Fall in housing starts to impact prices
The myth is that higher property taxes increase the cost of housing and office space over time. The reality is that higher taxes would leave less site-rent to be pledged to banks - thereby reducing the financial cost of property ownership - while also enabling the government to shift the tax burden back off labour on to property, as used to be the case in Australia before the mid-1970s.

This explains why the financial lobby supports the real estate lobby in shaping public perceptions of the property market - along with government financial policy towards the finance, insurance and real estate sector.

Australia's fiscal-financial system has become increasingly dysfunctional in giving tax preference to land-price ''capital'' gains and hence property speculation rather than tangible capital formation. Instead of raising living standards by producing more, what passes as post-industrial ''wealth creation'' takes the form of inflating asset prices on credit. The result is a bubble economy. And inasmuch as asset-price gains are fuelled by debt leveraging, wealth creation is more accurately viewed as debt creation.

The problem is that debts remain in place even as prices drop.

And they are dropping in response to the economy's shrinking ability to pay, as more and more income is earmarked to pay debts run up in the past. This debt service is not available for spending on goods and services. The result is debt deflation. Lower spending on goods and services shrinks the domestic market (and also shrinks imports), leading to lower business profits and also lower business rentals. Lower rental income results in lower property prices - and at a point, property falls into negative equity: the mortgage debt exceeds the current market price that home owners or commercial investors can recover.

This is the end stage of debt-leveraged bubbles.


2 comments:

Bukko_in_Australia said...

As someone who lived through the American property bubble in one of the bubbliest areas, I could see the same thing happening in Melbourne before we left. Real estate section in The Age giddy with stories about how prices were going up, Up, UP!, self-congratulatory crap from the head of the property agent's lobby, more auction billboards than I had seen for some time...

I can't see how it's not gonna blow. Why does Oz persist in doing the SAME stupid things America has, even when they've freshly seen how it fell apart there. Like it's gonna be different Down Under, they're so much smarter?

G. said...

Well, actually, we ARE a lot smarter than US citizens, who are surely the most STUPID people ever to walk this planet.

Take your money and go, Bukko. Bye bye.

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