I've done no reading Eppo, but what is this "capital" a measure of? Is it a measure of an entity's net worth?

I'm a bit confused, because on a financial statement, land is a "non-current asset" that can be impaired or revalued as required so when you take away your liabilities from your assets you are left with your equity. Are you saying that land wasn't considered an asset until 60 years ago, or am I just confused?

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Main said..

Adriano said..
But also as an incentive to invest in new property rather than established property - which has no net benefit to anyone or the economy at large other than individual landlords.

No one will know the true impact of this policy until or if it is imposed.

One thing you are forgetting is that a significant number of small business owners (which make up and in turn employ a large portion of Australian workers) leverage and often run their businesses off the equity in their principal places of residence.

if there is a fall in the value of peoples homes this will in turn impact peoples LVR positions on funding their small businesses. this will have far reaching side effects

I thought the policy fully grandfathers existing owners.

Have I read it wrong?

BS took a different housing affordability policy to his ALP national conference a few days back (and it's not on the ALP website, but the undisclosed changes to NG are mentioned). He was proposing a subsidy paid to landlords who build new homes and then ask for 20% less than the current "market rate" for rent. Whilst this is a great idea and uses a completely different angle to reduce rental costs and at the same time attract investors to build new homes, I'm wondering who figures out the "market rate" for rent for any given location? That's the big hole in the plan, who values the market?

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Adriano said..

Main said..

Adriano said..
But also as an incentive to invest in new property rather than established property - which has no net benefit to anyone or the economy at large other than individual landlords.

No one will know the true impact of this policy until or if it is imposed.

One thing you are forgetting is that a significant number of small business owners (which make up and in turn employ a large portion of Australian workers) leverage and often run their businesses off the equity in their principal places of residence.

if there is a fall in the value of peoples homes this will in turn impact peoples LVR positions on funding their small businesses. this will have far reaching side effects

I thought the policy fully grandfathers existing owners.

Have I read it wrong?

It does fully grandfather existing owners.

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Adriano said..

Main said..

Adriano said..
But also as an incentive to invest in new property rather than established property - which has no net benefit to anyone or the economy at large other than individual landlords.

No one will know the true impact of this policy until or if it is imposed.

One thing you are forgetting is that a significant number of small business owners (which make up and in turn employ a large portion of Australian workers) leverage and often run their businesses off the equity in their principal places of residence.

if there is a fall in the value of peoples homes this will in turn impact peoples LVR positions on funding their small businesses. this will have far reaching side effects

I thought the policy fully grandfathers existing owners.

Have I read it wrong?

No you've read it right.

What I'm suggesting is that if house values drop as a result of a decrease in demand (investment buyers) the broader effects will be people who have loans across their PPR's for things such as business loans and share portfolios will find their LVR's (loan to valuation ratio's) go into breach and they get the equivalent of margin calls from the bank. It means they either have to increase their equity or reduce their loan. I'm suggesting many wont be able to do either.

I think in theory the policy makes sense but i think the horse has bolted and too many people will be impacted if we see sharp decreases in the value of people PPR's. The problem/risk of changing a policy like this is that we don't really know how far reaching the impact could be. As i say, most small businesses are leveraged off peoples PPR's.

All true main. I note you're not arguing one way or another, but the sentiment is that uncertainty is bad.

How about the GST, or Mabo or any other controversial reform? Uncertainty is definitely the weakest argument against reform in my opinion although it's often used by many politicians as emblematic in scare campaigns...

I think in the end, reform catches out people who are already in a precarious financial position all by their own doing. Those astute investors will have factored such reforms into their investment stragtegy and this will not affect them any more than at the margins.

Quite simply for those investors who rely on tax perks to make something viable, rather than a successful income generating stragtegy - it's tough titties.

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eppo said..
The best thing a government can do is do nothing. But they won't. Too many have vested interests in land prices and the speculation of capitalised economic rent.

All gains will be taken by the land. and if you allow these economic rent gains to be capitalised and then traded you get the boom and bust cycles. Easy.

Land has only been considered capital in economic terms recently (last 60 years or so) before there was land, labour AND capital. Then they cleverly put land into the capital bracket and really put a sky rocket under the land game.

Alas as some of you need to read history more.

Ever wondered why the gap between the rich and the poor has increased.

Anyhow read some more get back to me. I can only try ....

What is capitalised economic rent ? I've never heard the term before...

Are you talking about using a capitalisation rate to value commercial property ?

When you say economic rent gains to be capitalised and traded are you talking about selling a commercial property after a rent review and cap rate compression ? or are you talking about price growth in property funds management terms and buying/selling units in trusts ? Sorry - but your terminology is not commonly used...

Surely land has always been a form of capital.!? Capital is just another way of saying "value that can be exchanged for money"

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Adriano said..
All true main. I note you're not arguing one way or another, but the sentiment is that uncertainty is bad.

How about the GST, or Mabo or any other controversial reform? Uncertainty is definitely the weakest argument against reform in my opinion although it's often used by many politicians as emblematic in scare campaigns...

I think in the end, reform catches out people who are already in a precarious financial position all by their own doing. Those astute investors will have factored such reforms into their investment stragtegy and this will not affect them any more than at the margins.

Quite simply for those investors who rely on tax perks to make something viable, rather than a successful income generating stragtegy - it's tough titties.

If i was to guess I reckon 50% of small business owners have bought themselves a job and rely heavily on structuring and leverage to keep it going. I also reckon 70% of them would fall outside the category of "astute investor".

The business I bought had 30 staff manufacturing widgets that ran at a loss unbeknownst to the previous owner. He didn't know because he hadnt introduced any job costing software that could measure and factor in the cost of the inefficient labour.

Cant comment on Mabo but the GST is a burden on small business that has increased cost and reduced profit and I reckon its just another tax. What I'd hate to see is Labor make a change that turns out to be a complete disaster with much further reaching consequences than intended.

The other issue it raises is whether investors will be turned off new property knowing that they could only ever on sell it to an owner occupier ? What will be the broader impacts of that affect if it were to happen...?

So while workable in theory Id still say leave it alone and find a different solution to affordability like releasing more land supply....

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Paddles B'mere said..
BS took a different housing affordability policy to his ALP national conference a few days back (and it's not on the ALP website, but the undisclosed changes to NG are mentioned). He was proposing a subsidy paid to landlords who build new homes and then ask for 20% less than the current "market rate" for rent. Whilst this is a great idea and uses a completely different angle to reduce rental costs and at the same time attract investors to build new homes, I'm wondering who figures out the "market rate" for rent for any given location? That's the big hole in the plan, who values the market?

It wont work because the yields will be too low. Without capital growth (which is what he's trying to stop) no one would invest in residential property. People only negative gear in the hope of capital growth.

We would see institutional investment in residential property (like the US) if the metrics worked in this country but they dont.

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Main said..

Adriano said..
All true main. I note you're not arguing one way or another, but the sentiment is that uncertainty is bad.

How about the GST, or Mabo or any other controversial reform? Uncertainty is definitely the weakest argument against reform in my opinion although it's often used by many politicians as emblematic in scare campaigns...

I think in the end, reform catches out people who are already in a precarious financial position all by their own doing. Those astute investors will have factored such reforms into their investment stragtegy and this will not affect them any more than at the margins.

Quite simply for those investors who rely on tax perks to make something viable, rather than a successful income generating stragtegy - it's tough titties.

If i was to guess I reckon 50% of small business owners have bought themselves a job and rely heavily on structuring and leverage to keep it going. I also reckon 70% of them would fall outside the category of "astute investor".

The business I bought had 30 staff manufacturing widgets that ran at a loss unbeknownst to the previous owner. He didn't know because he hadnt introduced any job costing software that could measure and factor in the cost of the inefficient labour.

Cant comment on Mabo but the GST is a burden on small business that has increased cost and reduced profit and I reckon its just another tax. What I'd hate to see is Labor make a change that turns out to be a complete disaster with much further reaching consequences than intended.

The other issue it raises is whether investors will be turned off new property knowing that they could only ever on sell it to an owner occupier ? What will be the broader impacts of that affect if it were to happen...?

So while workable in theory Id still say leave it alone and find a different solution to affordability like releasing more land supply....

All fair points from someone who firmly views things in an orthodox way, although I don't know how accurate your guestimates about who's affected.

I guess in the end, we'll never know if we don't try.

We can worry about the what-ifs for ever and end up doing little to nothing about housing affordability.

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Main said..

eppo said..
The best thing a government can do is do nothing. But they won't. Too many have vested interests in land prices and the speculation of capitalised economic rent.

All gains will be taken by the land. and if you allow these economic rent gains to be capitalised and then traded you get the boom and bust cycles. Easy.

Land has only been considered capital in economic terms recently (last 60 years or so) before there was land, labour AND capital. Then they cleverly put land into the capital bracket and really put a sky rocket under the land game.

Alas as some of you need to read history more.

Ever wondered why the gap between the rich and the poor has increased.

Anyhow read some more get back to me. I can only try ....

What is capitalised economic rent ? I've never heard the term before...

Are you talking about using a capitalisation rate to value commercial property ?

When you say economic rent gains to be capitalised and traded are you talking about selling a commercial property after a rent review and cap rate compression ? or are you talking about price growth in property funds management terms and buying/selling units in trusts ? Sorry - but your terminology is not commonly used...

Surely land has always been a form of capital.!? Capital is just another way of saying "value that can be exchanged for money"

Get that book Japie mentioned as a start.

Listen and read to an actual economist not some idiot like me on a forum.

That will lead you to a more in depth exploration of viewing the economy in a very different way. A way that makes
A lot more sense when you get your head around it. You listen to news differently, you read the papers differently and your bullsh1t meter is generally in the red, 99 percent of the time.

Do that and we can talk. Don't and stay as ignorant as most as we follow these PhD economists over the proverbial leveraged falls (and the next one is gonna make the GFC look like a walk in the park - they can only kick this can down the road so much) and even the so called experts won't see it until it's too late.

The havent seen it for the last 3-400 years and they won't see it this time either.

Do yourself a favour, start there.

It also makes a post like this very amusing listening to crew who are looking through the same old tired lenses that have not and will not ever stop this boom bust cycle.

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Main said....Capital is just another way of saying "value that can be exchanged for money"

Sure in commodities that are quantified and traded on markets, but we're talking about dirt here.

Dirt is not currently good value....it's all hype and smoke and mirrors....

Well, as someone with industry specific undergrad and masters degrees as well as 30 years industry experience ranging from an analyst in property funds management through to construction and development I reckon I've heard it all...!

I'm still fascinated to know the definitions of your terminology !

Rather than send me off to read a book - why don't you just tell me the definitions in 10 words or less and we'll see who understands what....

It's not about the dirt (which by the way you may not own if there are mineral rights held over your property). It is indeed about smoke and mirrors and a potentially fickle market. All commodities (land included) are priced by the market and so are only worth what the market is willing to pay for them. The price that the buyer (who makes up a part of the market) is willing to pay is actually the present value of the future benefits that they might receive by owning the commodity.

So to translate this across to land price/value, the buyer may wish to use the land to build an airport or develop it for housing, or may buy the land to grow a nice garden to relax in. But the concept remains the same, the buyer will pay the price that equals the future benefits that the buyer thinks they may receive from owning the commodity.

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Adriano said..

Main said....Capital is just another way of saying "value that can be exchanged for money"

Sure in commodities that are quantified and traded on markets, but we're talking about dirt here.

Dirt is not currently good value....it's all hype and smoke and mirrors....

Property has always been quantified and traded on markets. While the Govt restricts supply the prices are protected. HK is another great example.

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Paddles B'mere said..
It's not about the dirt (which by the way you may not own if there are mineral rights held over your property). It is indeed about smoke and mirrors and a potentially fickle market. All commodities (land included) are priced by the market and so are only worth what the market is willing to pay for them. The price that the buyer (who makes up a part of the market) is willing to pay is actually the present value of the future benefits that they might receive by owning the commodity.

So to translate this across to land price/value, the buyer may wish to use the land to build an airport or develop it for housing, or may buy the land to grow a nice garden to relax in. But the concept remains the same, the buyer will pay the price that equals the future benefits that the buyer thinks they may receive from owning the commodity.

Correct !!

and willing buyer willing seller!

Main, you've gotta learn to pick your economic conversations and pull back when the "going gets a bit tough"

I had an awkward economic conversation similar to this last year when I was flipping P&C sausages out the front of a pyjama party themed school disco, another volunteer was explaining to me that he was only answerable to the lord and that no laws applied to him and he was going to start up a trust because judges and MPs have them and you can just make your own money up from nothing if you have a trust. He then explained that if I didn't understand the concept of making money out of nothing with a trust that there would be no point in him explaining it to me so i said "right on brother, I'm going to go and give my wife a hand at the door". He has since lost his house, wife, family in addition to his mind that was already long gone

Back to commodities, why the f@#k would I buy gold? I've got no use for that shiny, corrosion resistant metal in my plastic world. But obviously someone likes the stuff somewhere

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Paddles B'mere said..
It's not about the dirt (which by the way you may not own if there are mineral rights held over your property). It is indeed about smoke and mirrors and a potentially fickle market. All commodities (land included) are priced by the market and so are only worth what the market is willing to pay for them. The price that the buyer (who makes up a part of the market) is willing to pay is actually the present value of the future benefits that they might receive by owning the commodity.

So to translate this across to land price/value, the buyer may wish to use the land to build an airport or develop it for housing, or may buy the land to grow a nice garden to relax in. But the concept remains the same, the buyer will pay the price that equals the future benefits that the buyer thinks they may receive from owning the commodity.

Otherwise called "residual value". Which is in fact always the case unless the vendor doesn't realise the future value. Otherwise known as "good buying"

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Paddles B'mere said..
Main, you've gotta learn to pick your economic conversations and pull back when the "going gets a bit tough"

I had an awkward economic conversation similar to this last year when I was flipping P&C sausages out the front of a pyjama party themed school disco, another volunteer was explaining to me that he was only answerable to the lord and that no laws applied to him and he was going to start up a trust because judges and MPs have them and you can just make your own money up from nothing if you have a trust. He then explained that if I didn't understand the concept of making money out of nothing with a trust that there would be no point in him explaining it to me so

I hear you !!

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Main said..
Well, as someone with industry specific undergrad and masters degrees as well as 30 years industry experience ranging from an analyst in property funds management through to construction and development I reckon I've heard it all...!

I'm still fascinated to know the definitions of your terminology !

Rather than send me off to read a book - why don't you just tell me the definitions in 10 words or less and we'll see who understands what....

I'm not disputing anything yo've said main, but I am enjoying reading all the self justification and one up-man-ship....

Paddles is right about the smoke and mirrors relating to the price of dirt.

Regarding this amazing book everyone keeps referring to, I have no idea what that is all about.

The smoke and mirrors is used by the seller to fluff up the "future benefit" of having the exclusive control/use of the land because that is what the buyer is buying, not the dirt. It's always about the buyer placing a present day value on the future benefits and then hoping like hell that they happen

Dirt is part of the picture but a significant one. Indeed.

Quite simply, my point is that land shouldn't be a commodity.

It should be a universal communal right, managed by communities and for the benefit of all. Sounds socialist to be sure, but that's how shxt worked very well for thousands of years. It's only recently we've commodified everything.

That's the core problem we have with over pricing land. We treat it as a commodity and worse, the price is largely set by rampant speculation unlike most markets.

So much "capital" is tied up in dirt, which is almost totally unproductive that it's easy to argue how much better an economy would perform if most of the capital was released into far more productive ventures, like construction, design, engineering, farming, community projects, tourism etc

Such a transformation would take some time, but the alternative of endless speculation about prices is not sustainable.

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Main said..

Surely land has always been a form of capital.!? Capital is just another way of saying "value that can be exchanged for money"

Just on the terminology side of things, in economics "capital" and "rent" have different definitions compared with what they mean in accounting. Nobody is wrong here.

In economics, land is not capital as it already exists and cannot be produced nor consumed. Capital is anything that is accumulated; produced and not yet consumed. Even knowledge is capital in this sense. In terms of what we call the "factors of production", land and labour are treated separately.

In economic terms, "rent" is income received in exchange for something other than labour. It also refers to the excess you could receive over and above the value of your labour. If your labour is worth $1000 per week but you're getting $2000 because the government issued a limited number of licences to perform whatever task you are doing, the extra $1000 is "rent". Hence the expression "Rent-seeking".

Hope that helps.

F@#k me, thanx AUS1111, I've been waiting for a definition of "capital" because I swear it's being mis-used and land (or rather the benefits of having the control of the land) is just an asset.

So, all this talk about housing affordability, and now that prices are finally easing a little, I see news that they are relaxing restrictions on interest-only investment loans to help prop up the price.

You're right Harrow, but it possibly won't make much difference in the big scheme of things. The banks will be very gun shy with approving interest only loans in a falling market and so the interest rate will be jacked up to reflect their exposure to risk. As a result the interest payment for an interest only loan won't be too much different to the payment for an equivalent interest plus principal loan. Works good if you're earning big bucks and are trying to drop your taxable income because the interest expense is much higher (for NG purposes) but for most normal people they will effectively go backwards.

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Harrow said..
So, all this talk about housing affordability, and now that prices are finally easing a little, I see news that they are relaxing restrictions on interest-only investment loans to help prop up the price.

It goes to show you how delicate the balance must be after all this time allowing it to create a bubble. Its a shame they let it get this far in the first place.

You would hope that someone in government would have a strategy about this stuff, but it doesn't seem apparent.

Prices falling is not a good thing, but stopping them rising is probably the best way to reign in affordability without too much impact on the economy.

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FormulaNova said..

Harrow said..
So, all this talk about housing affordability, and now that prices are finally easing a little, I see news that they are relaxing restrictions on interest-only investment loans to help prop up the price.

It goes to show you how delicate the balance must be after all this time allowing it to create a bubble. Its a shame they let it get this far in the first place.

You would hope that someone in government would have a strategy about this stuff, but it doesn't seem apparent.

Prices falling is not a good thing, but stopping them rising is probably the best way to reign in affordability without too much impact on the economy.

Stopping them rising is the sensible solution because it avoids the damage a fall will create.

It it would also stop speculation of capital gains which would in turn massively reduce the use of NG.

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FormulaNova said..

Harrow said..
So, all this talk about housing affordability, and now that prices are finally easing a little, I see news that they are relaxing restrictions on interest-only investment loans to help prop up the price.

It goes to show you how delicate the balance must be after all this time allowing it to create a bubble. Its a shame they let it get this far in the first place.

You would hope that someone in government would have a strategy about this stuff, but it doesn't seem apparent.

Prices falling is not a good thing, but stopping them rising is probably the best way to reign in affordability without too much impact on the economy.

So how do you stop prices rising without a considerable fall then?

Answer that correctly and you deserve a medal.

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saltiest1 said..

FormulaNova said..

Harrow said..
So, all this talk about housing affordability, and now that prices are finally easing a little, I see news that they are relaxing restrictions on interest-only investment loans to help prop up the price.

It goes to show you how delicate the balance must be after all this time allowing it to create a bubble. Its a shame they let it get this far in the first place.

You would hope that someone in government would have a strategy about this stuff, but it doesn't seem apparent.

Prices falling is not a good thing, but stopping them rising is probably the best way to reign in affordability without too much impact on the economy.

So how do you stop prices rising without a considerable fall then?

Answer that correctly and you deserve a medal.

You bring in a policy that dampens down demand by reducing the potential windfall gains. Just a little impact would be a start, not a huge change.

Determining 'the correct answer' is impossible as the only way to determine it is correct is to implement it and see what the outcome is. Even then some people would say it was the result of something else.