Dire Straights: Money for Nothing

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You have just got to love rising housing prices. Governments get vast revenues that shore up budgets, banks make slim margins on rapidly increasing volumes of loaned moneys, owner occupiers and investors alike can release equity and increase leverage, which in turn fuels consumption led economic activity and boosts economic growth, which all sounds great.

Of course, some cynics will scratch their head and be a little bit cynical about the whole thing. Such small minded bigots might point out:

image– Debt fuelled (equity release, which is in fact debt increase) consumption led economic activity, is what economists call “bad debt” – as in, it does not create jobs or increase the nations productive capacity… What a capitalistic prick I must be to use such terms. Anyhow.

– Governments relying on stamp duty to shore up budgets. It is a bit like relying on gambling tax cuts (here is looking to you Victoria), which has the unpleasant outcome of making the government an addict and enabler of the problem.

– Banks make slim margins on rapidly increasing volumes of loaned moneys. cough GFC cough.

Simply put, the banks are revenue making geniuses while it works, like any Ponzi scheme. When it crashes, and equity margins are alchemised into junk for owners and bankers alike, they are teflon-like. Unless you do an Iceland, and then they are ruined and suitably chastened.

Look, we live in a time of the lowest interest rates in living memory, and stupendous house prices. You are a chump if you don’t chase the price increases. ¬†Sitting on the sidelines, we are all affected, and this is the worst part. An economist might point to the above as a short term set of concerns and outcomes.

Let’s look at a more troubling aspect which is on a longer time scale:

– Property price rises leads to rental price increases. Rising rents require rising incomes (from residential or commercial tenants.)

– The increase in rent and associated prices of consumer goods and services, results in increases in welfare, which leads to indebtnedness AND economic migration under the guise of asylum.

– Rising incomes mean rising costs of production. For industry, rising wages and rising commercial leases is a hefty reduction in competitiveness.

-Rising costs of production leads to reduced competitiveness. Reduces competitiveness in the long term leads to lower employment and a reduced exchange rate/ terms of trade.

We should see a plunge in the exchange rate toward 60c USD in order to maintain competitiveness. As the exchange rate plunges, we should see inflationary pressures unleashed from rising energy and consumer goods import prices. This ought to force the hand of the Reserve Bank to raise interest rates even as unemployment grows.

And it is this last point which is at odds with the dream of ever increasing housing prices.  We are addicted to heavily in-debting ourselves AND making ourselves internationally un-competitive.

In the medium term, something has to give, and when it does hindsight will be a bitch.