- Money Morning Australia

Property is Not a Hedge Against Inflation

Written on 23 February 2010 by Kris Sayce

We’ll poke a stick at property and inflation today.

Inflation, if mixed with deflation is fine. Prices rise, then prices fall.

But inflation by itself, well, that isn’t good at all. If you look at the chart below, you can see perfectly how the value of money has been devalued almost without break for the last fifty years:

Money devalued by 99.4%


Money devalued by 99.4%


According to the Reserve Bank of Australia (RBA) numbers on Money Aggregates, the M3 money supply has increased from the equivalent of $6.7 billion in 1959 to $1.19 trillion by the end of 2009.

In other words, the value of money over the last fifty years has fallen by 99.4%. To put it another way, the equivalent of a dollar held in 1959 is almost worthless if still held today.

Now, I know it’s not likely that you’ll have kept the same currency unit in your pocket or your bank account for fifty years, but the point is, thanks to inflation your wealth is being eroded on a daily basis.

Even if we look at a shorter time period, 1990 to 2009, you can see the M3 money supply has increased from $207 billion to $1.19 trillion:

82.5% decline in 30 years


82.5% decline in 30 years


That’s a depreciation of your dollar by 82.5%. And that’s just within the last thirty years.

The reason I bring this up is to try and settle an argument we’ve scoffed at but which the property spruikers are convinced is true. That is that property is a hedge against inflation.

That if you buy a property today it will rise in line with the prices of everything else and therefore your debt will be paid off easier because of inflation and you’ll be left with a higher priced house.

Our argument has been, “Where’s the proof that inflation and property prices are directly correlated?” And furthermore, we constantly warn anyone not to believe that inflation is your friend. By itself, inflation is always your enemy.

So far, the spruikers haven’t come up with anything to back their argument. So, our only course of action is to try and refute our own argument. We’re happy to try, it keeps us on our toes.

Below is a chart we knocked together using data from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA). It compares the index values of ‘8 Capital City House Prices’, the Consumer Price Index (CPI), and the M3 money supply:

Are inflation and house prices correlated?


Are inflation and house prices correlated?


Now, before I go into too much detail, a quick note on the dates.

You’ll see it only runs from 1986 to 2005. Just to make it clear, we haven’t cherry-picked that timeframe for any particular reason. The only reason we’ve done that is the ABS changed the index calculation for house prices in 2005 and we didn’t want to mess around with trying to marry up the two sets of numbers.

Anyway, the dates aren’t as important as the comparison of the data sets over the same timeframe.

As you’ll note, using a logarithmic scale, the green and blue lines move almost in tandem.

In index number terms, the 8 Capital City House Prices index has risen from 61.3 in June 1986 to 251.9 in June 2005. That’s a 310.9% increase.

Over the same period, the M3 money supply increased from $125 billion to $678.5 billion. An increase of 442.8% in the money supply, or a decrease of 81.5% in the value of your money.

In percentage terms that’s a pretty big gap, but on the chart, well, it’s hard to see any difference. But, as we’ve pointed out before, you can’t just put two different data sets on a chart and claim there is or isn’t a correlation.

But in this instance, whether there is a correlation or not is irrelevant. We don’t need to prove or disprove it, we can simply look at the data and draw a simple conclusion. And that is, between 1986 and 2005 the M3 money supply increased by a greater amount than the value of the 8 Capital City House Prices index.

Therefore, we can say that during that period, house prices did not provide a complete or perfect hedge against inflation.

The divergence is more obvious if we use a linear scale:

Inflation almost off the charts!


Inflation almost off the charts!


The interesting point to note is by how much the official CPI number understates the impact of the devaluation of your money.

If you just take the 8 Capital City House Prices index and compare it to the CPI then you’d be left with the false impression that property is an inflation buster.

Whereas the truth is that the CPI number masks the real story. And that is the value of the dollar has fallen to such an extent that even the so-called housing boom has failed to maintain the value of your dollars.

In fact we can go even further than that and say that between 1986 and 2004, the real price of property would have dropped as the value of your dollar fell faster than the price of homes rose.

Look, we’re sure the property spruikers won’t like that, and they’ll set their Phasers from stun to kill, but those numbers speak for themselves.

If you accept the fact that creating more money has a devaluing effect on the money already in circulation, then you must also accept that you need to take the real rate of inflation into account when valuing an asset after a specific time period.

In this case the value of the 8 Capital City House Prices index has failed to keep pace with the increase in the money supply – M3.

Of course, articles such as this one from Peter Boehm over at Yahoo! Finance prefer to use the CPI when he claims, “Combine this with a return to stable economic conditions and relatively low and stable interest rates and you have the necessary ingredients for home prices to increase well ahead of inflation.”

He’s referring to the growth rates required to make the median house prices in Sydney, Melbourne and Brisbane $1 million by 2019:

Median House Prices at $1 Million October 2019


The trouble is, by 2019, if the increase in the money supply is anything like it’s been over the last ten years, then the 117.8% increase for Brisbane will have been dwarfed by the 184% increase in the money supply:

Inflation to outpace property growth


Inflation to outpace property growth


Simply put, the increase in property prices won’t have kept pace with inflation.

We’ve heard plenty about “Property Millionaires”, yet the reality is that they don’t exist in the way the spruikers would have you believe.

What they should really be called are “Property Debt Millionaires.” $1.1 million of assets and $1 million of liabilities. Waiting for the so-called ‘equity’ in the home to increase and then withdrawing more cash to take out more debt.

Isn’t there a saying about ‘credit’ being the only difference between the hobo on the street and the majority of home owners?

So, when the spruikers talk about the median house price reaching $1 million in 2019, just remember a couple of things…

First, a million dollars in 2019 won’t be worth what a million dollars is today or ten years ago.

And secondly, if you look at the chart below:

Million dollar mortgages


Million dollar mortgages


If owner-occupied housing loans increase at the same rate as they have over the last ten years, then even though the median house price very well could be $1 million by 2019, odds are the median mortgage won’t be far behind.

The upshot is, by these numbers you can argue property prices have already fallen. But that’s only the half of it. So far, the insidious effects of inflation have meant borrowers are suffering a silent ‘debt-death’.

The realisation and the pain will be more obvious when borrowers experience an actual fall in the price of housing in dollar terms. Contrary to mainstream belief about Australia missing the housing crash, the facts are it’s likely to happen sooner than we all think.


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70 Comments For This Post

  1. cb Says:

    I am reposting my earlier response to this article here, where it properly belongs. Hopefully Kris will see it and will address the GDP adjustment to the M3 somehow, for a more accurate picture of the relationship between property prices and inflation.

    Hooray!!!! In this morning’s MMA (now posted), Sayce has risen to the challenge of providing us with graphs that plot house price appreciation relative to money printing and the official inflation figures, as represented by the CPI. So, on that score, congratulations and thanks are in order.

    This is a very welcome and long overdue contribution to the housing market question that tends to generate the most interest in this forum. It addresses aspects of the property gloom and doom prognostication which has been sorely lacking up to this point. With those remarks out of the way, I would like to make a few observations:

    1. It is a welcome sight to see Sayce toning down his dooming – glooming rhetoric from the hard line position that property is not an inflation hedge at all, to a more reasonable and credible position that it is not a perfect hedge against inflation. To this, I can only say: Welcome to the club, Kris. That is all we have been trying to tell you from this side of the great divide, that house prices losely reflect excess money printing relative to the goods and services created in a growing economy.

    2. The article, uncortunately, fails to account for the growth of the economy, i.e., the increase in goods and services generated over time, which is a weakness. It only deals with the doctored CPI figures, which understates real inflation, and with M3 money supply, which by itself is wrongly assumed to reflect the degree to which inflation is gutting the purchasing power of our money. Ergo: we still do not have a measure of real inflation, because while the CPI’s doctored and tortured numbers understate it, M3 overstates it.

    The net result, unfortunately, is that we still do not know how property prices have been behaving relative to inflation, where inflation is being defined as the amount of money and credit being created IN EXCESS of the goods and services created in the economy.

    3. One possible way of addressing this problem would be to deduct the official GDP numbers from the M3 figures, and that would get us probably as close to the real inflation figures as we can hope to get, even though this will once again be imprecise, because GDP figures are just as much subject to torture by the number crunchers as the CPI, only that it tends to be overstated.

    Nevertheless, a comparison of housing prices relative to a GDP adjusted M3 would be a more useful way to make the argument than it is by reference to the unadjusted M3. The upshot of this is that the gaps claimed by Sayce between housing price increases and a faster increasing M3 would be reduced, which in turn would mean that house price increases are not falling behind real inflation by as much as Sayce’s comparison to an unadjusted M3 growth would suggest.

    4. Even so, even as the argument stands, Sayce has succeeded to demonstrate his earlier claim that there is no logical reason why house prices should continue rising, and that if there should be such a reason furnished by the spruikers, he would listen. I charged him with not listening to the argument from inflation and challenged him to produce an article with graphs such as these. It is good to see that he has, but he has done so with great reluctance to actually concede defeat. How so?

    5. While he concedes that there is a correlation between house prices and inflation, in addition to arguing that housing hasn’t been as good an inflation hedge as one would have thought (although we don’t know that because he fails to adjust M3 by the GDP), he refuses to deal with the question whether house price increases were due to money printing/inflation, or not.

    6. Following on from 5, Sayce acknowledges a sort of correlation between the two, but seems reluctant to admit that house price increases have been driven by inflation. I am puzzled why this should be, and the question arises whether there is a more likely cause we should identify. I, for one, am not aware of any. Are you?

    7. By Sayce’s own arguments, if money printing has been running so far ahead of house price increases, then if you believe that excess money printing is likely to show up in inflating real asset prices, then we have at least a prima-facie argument to the conclusion that the march of the great Austrlian housing price is likely to continue. All other things being equal (caution: they rarely are), unless we have good reasons to believe that the excess money being printed (in excess of underlying economic growth in terms of goods and services), is going to be disproportionately diverted into other investments and assets (such as the new NBN and goodness knows what not), you would have to assume that house prices will continue to benefit from excess flows of money into the economy.

    Sayce, for reasons I cannot quite fathom, seems to assume otherwise. It might be because he believes that the printing presses are going to seize up, but I am not quite sure.

  2. cb Says:

    I thought that these definitions of money and money supply might be useful to have pasted in here.

    Money is anything that is generally accepted as payment for goods and services and repayment of debts.[1][2] The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment.[3][4]

    Measures of money
    The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. The money supply is usually measured as three escalating categories M1, M2 and M3. The categories grow in size with M1 being currency (coins and bills) and checking account deposits. M2 is currency, checking account deposits and savings account deposits, and M3 is M2 plus time deposits. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.


  3. SV Says:

    Over the same period of time (1986 to 2005) Gold price in A$ changed from 500 to 700 – an increase of 40%.
    Source: 30-year-gold-price-history.html

    What kind of hedge is that?

  4. SV Says:

    By comparison, from 1993 to 2004 share price of Woolworths increased by approx 400% (5 times), share price of CBA grew by 300% and share price of Harvey Norman by 1000%.
    Unfortunately could not find earlier data

  5. etch Says:

    ‘the fianancial wheel has over-run its self ,to the point of affecting even by-standers”

    if or this frenzied pace continues of this BS BOOM .
    austerity will be introduced which will affect more than just grand-parents
    everyones on the bandwagon

    as they say

    “when the bellboy starts talking shares or property,thats the time to GET OUT”

    its totally amazing pet dogs havent “talking” woofing ,about the value of their KENNELS going up in value also .

    this madness of JUST PURE GREED , will phuccc over & hurt everyone in australia ,involved or not.
    people have forgotten 1990 recession..i havnt,,

    banks will be putting up interest rates & CRASHIO IT WILL GOOOOOOOOOOOOOOO((((((((((((((((((((((((((((((((((((((((((((((((((((((

  6. JC Says:

    “Over the same period of time (1986 to 2005) Gold price in A$ changed from 500 to 700 – an increase of 40%.”

    Really?? I have some GOLD ETFs that are up 40% over 3 years (I know, it’s not gold but I have my reasons).

  7. Nick Says:

    JC…regarding gold EFTs

  8. SV Says:

    have a look at the chart yourself:
    http://goldprice.org/30-year-gold-price-history.html You will see that it was going nowhere between 1986 and 2004, then shot up.

    My observations are:
    – bank shares grew in line with property values
    – both property values and bank shares at that period were a better inflation hedge than gold. Especially keeping in mind that, if unleveraged, they both would give you a yield in addition to growth.
    – shares in a monopoly/oligopoly trading essential consumer goods were a better hedge than either (although Woolworths is more than an average ccompany)
    – growth in credit helped propel discretionary retailers and probably many luxury manufacturers.

  9. JC Says:

    Thanks for the heads up Nick. I’m well aware of how bogus they really are, but it’s a speculative move more than anything, not wealth preservation. I’ll pull out of them in time. I’m just waiting for the roar of the approaching herd.

    SV, your point is well taken and I can see exactly what you’re trying to say. Shares and bank stocks wouldn’t be what I call an “inflation hedge” though. Any old fool could have made money out of both of them.

  10. Peter Fraser Says:

    The increase in value of property is twofold, first in the inflation of the value of the property itself, and second in the devaluation of the debt by that same rate of inflation. If in the meantime rental equals interest cost then voila you have a gain.

    Thus on a geared purchase the buyer gets the equivalent of two times inflation less the net cost of borrowed monies.

  11. Geoff Says:

    I have enjoyed reading the critique of housing and value of money over the last month and I have a question/suggestion about real value. If you can do a graph showing how much gold(in ounzes)per square metre it costs to purchase a house – do this chart over several decades using the wage at that time against the house price at that time – Also the weekly repayments for a 30 year loan in gold ounzes for each year per square metre of house – Does this address any of the issues that seem to confuse me about the effort I have put into obtaining my house over the last 30 years?

    Another observation from left field – if you teach that markets rule and everything has a dollar value – I believe there are many people making major financial blunders in their strategy by ignoring the “intangibles” of relationship maintenance – I spoke to a building industry tradsman/small owner operator – He had a barny – no.10 or 11 with his wife and moved out to live in one of his investment flats – I suggested he could benefit from discussing it with someone – he swore black and blue he would not go near that stuff (counselling)- I see he is making a financial decision to throw away a million of his dollars without getting any advice. The hard nosed approach to making money and similar attitude to relationships is going to dog people that could flourish both in business and family life. This magazine seems to ignore the development and nurture of intangibles that will greatly influence their lifelong maturing as a smart business person.

  12. cb Says:

    Good points, PF. Plus you also need to take into account that an owner occupied residential property will not be hit with any sort of inflation tax (they call it capital gains tax), and investment properties are hit with only 15% inflation tax when you sell at a higher price.

    But, hey, taking all this into account in an evaluation can prove overly complicated, not to mention inconvenient. The more complicated story is that working with debt/leverage hightens your risks, but in a relentless inflationary environment it can be very hard getting ahead if you do not harness the double action benefits accorded by leverage. The bottom line is that we do not live in a stable, monetary and fiscal environment, and wealth accumulation approaces that ignore this fact are working at serious disadvantage. Still, tolerance of risk is a highly individual thing, and one should not push things too much outside one’s comfort zone.

  13. cb Says:

    SV – As you make the point, there is no such thing as a perfect inflation hedge. In a fiat monetary system where liquidity sloshes about, speculation is rife and money will flow into all manners of asset classes and investment areas, creating booms, while others are neglected are left languishing for decades.

    After the 1982 gold mania and the subsequent crash, people were put off gold for a long time. Volker increasing rates into the high double digits made saving in dollars far more attractive for starters, plus central bankers have been dishoarding their gold reserves, often surreptitiously through so-called gold leases, to surpress the gold price. The bottom was finally in when that criminal idiot in the UK auctioned off half of his country’s reserves amidst great fanfare. Since then, gold has started a major bull run, which is set to continue amidst all the volatility and rampant money printing that goes on. That is my understanding, anyhow.

  14. Peter Fraser Says:

    cb @ 11 – agreed – but CGT is on 50% of profit less CPI on the duration held.

  15. wjc Says:

    Whilst M3 graph shows overall money and house prices are relative to the number of houses available, wouldn’t population need to be taken into account for the M3 graph ? Thus as population increases shouldn’t the M3 graph be deminished over time ? Or am I off the mark ?

  16. cb Says:

    ah, PF. I stand corrected. CGT on investment property is 50% as you say, taxed at one’s individual marginal tax rate. But does the calculation of the final taxable amount also include a downward adjustment by annualised CPI? I did not know that.

  17. MP Says:

    I subscribe to most of the Port Phillip publications, and really enjoy Kris’s commentary in this newsletter. I fundamently agree with Kris’s economic perspective (I have a degree in Economics). Also I am not from Australia (I live here for the moment however). What I dont understand (and I hope PF can clarify) is what is fueling the house price inflation in Australia. In Melbourne $1 mill ($900, 000 US !) does not buy much these days. Is it simply people trading houses ? Are the banks willing to lend huge amounts of money ? – eg $200,000 into a NAB borrowing calculator, came back with approx $1.1 mill ! Are the majority of Aust city residents making $200 – $300k household income ? Is it immigration ? Stats say the majority of UK, NZ, SA immigrants move to Perth / Brisbane. Given the state of the UK, NZ economy (including housing) I doubt they would that cashed to afford Melb, Syd prices. So PF from what I understand you work in the mortgage industry – how about providing specifcs on whats fuelling this level of housing inflation ?

  18. BB Says:

    PF is right in his almost gleeful rebuke of just how tax beneficial property investment is. but his focus is not on homeowners fighting inflation via their own residence. No no no. It’s all about the PROPERTY INVESTOR. You have to ask yourself (and let’s hope Ken Henry did too) why is the full amount of any interest earned on savings taxed ( and bare in mind that those savings are previously taxed as income too) before any residual earnings are ‘saved’ and yet residential property profits are only half taxed on the capital increase and that is after deducting for inflation effects? The answer of course is that the speculative bubble of ‘investing’ in property is entirely propped up by legions of suited lobbyists who don’t want this merry go round to stop. If Rudd has any guts at all he will end this ridiculous charade and make the housing industry sector one that actually serves the ideals of affordable home ownership in Australia. In an equitable country CGT should be levied against 100% of any profit made on the sale of residential investment properties. What plausible explanation (and don’t bother with the bullshit story about a rental property vacuum resulting until you can rationally explain just who the property investors will be selling their properties to when they all bail out of this sector due to a fair and equitable increase to CGT) can there be for this distorted and selective favoritism within our tax system apart from the leeches operating within the property investment sector that appear to want their cake and eat it it too?

  19. SV Says:

    There is absolutely no question in my mind that property speculations of recent years are caused by the favourable tax treatment. However, the same 50% discount on capital gains applies to shares or to a sale of your own business. In fact, the CGT treatment of sale of your own business is much, much more favourable than any property. The negative gearing rules also apply to shares as much as to property – only you won’t risk gearing your share portfolio to 80% like property investors do.

    The net income you receive from property, as well as shares, taxed at your marginal rate – there is no difference from the savings account. When Costello introduced the 50% discount on CGT, the idea was to encourage investment. It is considered that achieving capital gain is more risky than steady income and hence the tax law should reward it (similar to how a self-employed person has more avenues for tax deductions than an employee, because he is taking more risk).

    As for Rudd having guts to resist the building lobby – you cannot defy people who bankrolled your election campaign. The building lobby – both unions and developers – milked this government to the fullest extent. The low unemployment is due to government support specifically in the construction industry.

    And look how good this support is: at the time when private construction falls, bricklayers, plumbers and others’ rates went up!

  20. Frank Says:

    Sayce is so rabid he put most lefties to shame – he never lets the facts get in the way of a good argument but prefers the shrill diatribe to reinforce whatever spurious point he is banging on about at the time. Having said that I often agree with the general thrust of what he says but he fails to back his case with well reasoned argument and undermines it with intellectual sloppiness. One example from today’s column – as well as neglecting the discounting of M3 growth for GDP growth it might be wise to also discount it for population growth since 1959. That way he would not be comparing an aggregate (M3) with a mean (House prices). Let’s see him run the numbers with a per capita M3 properly discounted for GDP growth and see what the graph looks like – I wouldn’t be surprised to see house prices easily outpacing inflation – and the real reason is people’s insane propensity for taking on increasing amounts of housing debt – viz. from RBA figures total housing debt has ballooned from 284B to 1080B in the 10 year period from Jan 2000 to Jan 2010 – nearly a four fold increase (of course these numbers need to be discounted for GDP and population growth as well but the impact won’t be a stark for a 10 year period vs 40 as in Sayce’s case). As Dan Denning brilliantly points out a large proportion of this is foreign debt of short duration and vulnerable to interest rate shock – THIS will be the mechanism that eventually crushes the Oz housing market and takes the economy with it – just like the good ol’ U.S.A. …….

  21. cb Says:

    Ah, Rudd is a creepy little weasel, a baby faced slimey chicken little. At the same time, he can be very vindictive, if crossed, so it is hard to know what he is going to do. I am singularly unimpressed with his recent scaremongering of the nation regarding threats of terrorism. He would rather make us all scared and tremble in our boots than lose an election. I would not know where he will draw the line. It seems like he is one of those prepared to do anything to get re-elected. Now that his favourite horse is dieing under him and his mismanagement is being exposed, he is trying to play the terrorism card. What a creep.

  22. cb Says:

    Well, here is a doomy gloomy piece for those feeling bearish today:
    ‘Buy farmland and gold,’ advises Dr Doom

  23. SV Says:

    I would feel uneasy in calling the PM a creep and a slime publicly, but hey that’s just me.

    Well we’ll get our chance in November, and I would love to see him removed; although he may bankrupt the country by then. Maybe we should petition the Gov-General to remove him before next budget – what do you think?

  24. JC Says:

    PF raises the relevant question as to whether or not you can afford NOT to be leveraged in property during an inflationary environment. While his phaser might only be set to stun mode, I think this is highly relevant. However, I know this is straying from the argument somewhat.

    I’m more interested in the hypothesis that rising housing prices are correlated to an ever-expanding money supply.

  25. Peter Fraser Says:

    BB – I just stated the facts. Was I wrong to do that. Should we make incorrect assumptions and use them as our measure. I don’t recall being gleeful, just disappointed that Sayce keeps making fundamental errors like that. By being selective in his scenario he avoided the reality of the situation that presents for the majority of home buyers, who incidentally are not investors, and don’t pay any CGT at all.

    cb – yes the CGT is on 50% of the profit LESS an allowance for CPI rises in the interim (use the ABS figures). That way you are only taxed on the real capital gain rather that just a dollar gain.

    Apologies in advance to all those offended by realities.

  26. Nick Says:

    sandra…read cb’s link #18. remember we were talking about China/Russia/Iran alliances etc? Well this part may help you understand the bigger picture.
    “Today the US has a considerable advantage over China because it has free access to oceans on both coasts, and has potential energy suppliers to the north and south in Canada and Mexico.
    It also commands an 11-strong fleet of aircraft carriers that could, if necessary, secure supply routes in a conflict situation.
    China and emerging Asia, meanwhile, face the uncertainty of supplies that must travel from the Middle East through winding sea lanes and the Malacca bottleneck.
    American military presence in Central Asia, Dr Faber said, may add to the level of concern in Beijing.
    “When I tell people to prepare themselves for a dirty war, they ask me: “America against whom?” I tell them that for sure they will find someone.”

  27. Peter Fraser Says:

    JC – I wan’t trying to stun anyone. The overwhelming majority of homebuyers, especially FTB’s use finance, so to me that is the natural scenario to use.

    You may enjoy this post from Chris Joye who is so loved here.


    Within that article he raises some interesting points about the ratio of debt to GDP and some other issues that may interest you, even if you hold an alternate point of view. It never hurts to listen to both sides.

    That is why I visit here, although the value of the logic is diminishing in the articles being offered, still I can only hope for some enlightenment in a post one day.

    Cheers guys.

  28. cb Says:

    SV – You are right, I should watch my mouth. With nitwit little dictators, truth rates naught as a defence.

  29. Tim Says:

    Do the graphs take into account wage increases?
    I’ve tripled my wage in 10 years.

  30. cb Says:

    That is a very good question, and a very good point, Tim. So, now we have two critical figures missing to give us a somewhat realistic and workable picture of where we are up to with inflation, and property prices: wages growth and the GDP. Absent these, how can you tell which way is up, let alone which way is North and South?

  31. cb Says:

    Sorry, not inflation, but the affordability of property prices.

  32. K P Says:

    I feel that many of you are in danger of becoming Statists!

    The problem of any Govt is that it believes that it can count the actions of individuals, agglomerate them and then predict them. From that of course, it tries to manipulate them!

    They have no more chance of understanding why 20million Aussies do what they do than they have of understanding global climate! There are far too many factors involved and bureaucrats have an alien mindset compared to people in the private sector.

    So I don’t care what the ststistics show, its time for me to retire on whatever wealth I’ve managed to accumulate by my wits, and spend my time avoiding taxes and Govts!

    PS- nothing like the social engineering shown by laws such as “anti-discrimination” or “hate speech”! Human nature vill be changed!! Ve vill tell you how to think!

  33. JC Says:

    Thanks for the reading PF. I”ll wrap my head around it at lunch. Whenever I read anything of his, it always raises more questions than it answers (for me anyway).

  34. JC Says:

    I don’t know if you should accept everything Sayce says as water-tight, but it is thought-provoking. Compare that to the soapbox of Chris Joye, which can be highly enlightening but essentially is filtered through a narrow prism.
    I will take your advice and cover as much as my limited time and cerebal capacity can handle.

  35. Bill J Says:

    PF –
    ‘cb – yes the CGT is on 50% of the profit LESS an allowance for CPI rises in the interim (use the ABS figures). That way you are only taxed on the real capital gain rather that just a dollar gain.’

    I am a little reluctant to provide any information about tax being that I am not a professional, and well, you aren’t paying me to do it….but I don’t think you have your details correct.

    A quick perusal of the ATP website shows that you can only use the indexation method OR the discount method. Not both.

    And even that is restricted. If you acquired the asset after 21 September 1999, you don’t have a choice – you have to use the discount method.

    Of course, being that I am not a professional, there may be some loophole that allows one to do both. I’d be happy to be proven wrong.

    I attended a ATO seminar on real estate last year and it was pretty enlightening. The biggest impression I took from it was that deductions related to real estate far exceeded income from real estate and that many property owners did some pretty dodgy things with their taxes.

    Hmm, maybe they are no different to anybody else.

  36. Peter Morgan Says:

    Australian property is overvalued compared to other international markets because of negative gearing. The idea that buying a depreciating asset and then selling it represents a legitimate business activity is preposterous. Hopefully the Henry tax review will have something to say about it and critically, the government will act on it. Renters priced out a result? Think not – the market willstill set rental levels and investors will sell resulting in the adjustment to prices Australia needs to see for the good of all its people. But boy will the investors and spruikers be squealing like stuck pigs. Should be fun.

  37. Bruce Says:

    If you are charged for a capital gain on a rental property – can you claim a capital loss if the property sells for less than what’s owed at a mortgagee sale ?

  38. cb Says:

    And the blows just keep coming for Greece and the Eurozone. And it is clear to me that it is all engineered. I would say, send the wolves to the wall and investigate them for cartel behaviour and conspiracy to defraud the nation(s).

  39. cb Says:

    Bruce, the answer to that is YES, but the figures are actually calculated on the basis of the purchasing and selling price, rather than what may and may not be owed on it to the bank. If you sell at an overall loss, you do not get money back from the tax office, though. Instead, you will record it as a capital loss that can be carried forward into future tax years, and you can claim those losses against any future capital gains you might have in the same asset category, ie., property loss against realised property gain, but not against realised share portfolio gains. That’s my understanding, anyhow, but PF would know this better.

  40. BB Says:

    SV. You seem to have made the point better than I. I have a fundamental belief that goes to the other item referencing the lost opportunity of advancement via investment in business opportunities rather than speculative building development within the residential market. I support any means that would encourage that including reduced CGT – particularly for targeted industries. Perhaps even non-residential development should remain in this basket BUT for the life of me I don’t understand why people cannot see the link between the bubble in house prices and the beneficial treatment of tax in respective of those who which to leverage big and play the housing sector as an investment vehicle. It must be stopped. Priorities must be given to allow affordable home pricing to reset and stabilise and if removing the incentives of investment in this sector is a means to help achieve this then I think it should be done and possibly include some disincentives such as significantly higher borrowing costs for each and every ‘house’ purchased as an investment vehicle.

  41. Peter Fraser Says:

    Bruce – You should consult your accountant. I know that you can lose on the sale of shares and not be able to claim the loss depending on the circumstances, so property may be the same. Commonsense would dictate that a loss should be claimable, but in general many taxation rules are written to favour the ATO and not the investor, although many would have you believe otherwise.

    I just have a feeling that you need to satisfy the professional investor status requirements or something of that nature. In short I’m not sure.

    Phone the ato for advice.

  42. JC Says:

    I read the blog and I even downloaded the “Private and Strictly Confidential” presentation. The argument about debt is simple from Joye: absolute debt is not an issue because outstanding loans to the total value of our housing is only 30%. Oh, and debt service ratios are low. It’s a bare assessment if you ask me, but all the graphs support the story. Steve Keen’s going to have a rough time in the debate. Let’s just hope Joye doesn’t rough him up too much. What is interesting to note is why Joye even bothers with Keen, given that he’s written him off as a silly old crank.

  43. PuntPal Says:

    BB – Its no wonder why our productivity as a nation is going down every year. Money spent on McMansions is money not spent on research, development and innovation.

    Furthermore, one could contend that the paper wealth created during this boom has led to Aussie’s developing a sense of complacency. Think of the small business owner that now owns 2 investment properties and on paper is worth nearly $2 million. What is he going do with any spare equity he accumulates?

    He won’t be rolling it into a risky business loan that would actually create wealth. He will simply double down on housing, ensuring our productivity as a nation continues to languish.

  44. Nick Says:

    aren’t you glad we live in the lucky country! One where we can “fiddle while Rome burns” and gleefully say to the rest of the world “let them eat cake!”

  45. Peter Fraser Says:

    JC – No I don’t think he writes him off as a silly old crank, there is more respect than that. They are both academics, and both are used to debating this issue.

    It’s an opportunity for us to hear both sides. Argument and counter argument, isn’t that a plus for us.

    I would like to get a video. It maybe on Sky business.

  46. RT Says:

    Knocking charts together is obviously not your strong point. Comparative index charts start at the same point on the Y axis and then change from there to compare them. The relative movement is what we are chasing, not the absolute index in its own series. If you now start all 3 at the same point in 1986 in your log chart it looks as though M3 and house prices have moved the same, so your story is looking sick. Even more so if you adjust for GDP growth. The actual figure should probably look like…………. CPI !, so boy have you proved the property people correct.

    As to removing negative gearing, just check the Hawke/Keating experience and the reasons why it was quickly reinstated.

  47. Kevin B Says:

    If you value logic PF @ 23 then surely you must know that that Joyce saying we have to compare the value of assets to debt in order to determine whether the debt being taken on is affordable is plain misleading.

    1. Mortgage debt is not the only debt to be considered. All personal debt must be considered because in the event of default that asset can be liquidated in the event of default on other debts other than mortgages. The only other asset class that would be repossessed in the event of default is a car provided the equity value in the car is more than 6.5k which is rarely the case because either the car is leased and the leasee has no equity interest or has borrowed the money to buy it and the equity value does not permit repossession (unless the loan defaulted on is the car loan itself).

    2. You can take on as much debt as you like but if you can not afford to pay it back then it gets taken from you and once it is a mortgagee sale you are not going to realise its “true value”.

    3. Value of an asset is illusionary and is in the eye of the beholder. Sure real estate might be worth that now but what if a depression hits and a lot of property hits the market at one time. Naturally the savvy consumer is gonna smell a bargin and will wait to they believe that the time is right to buy. The forced seller becomes more desperate etc.

    4. The comparison assumes a straight line which patently is not true. Some have a much higher debt to asset ratio. In the event that something happens those that have a higher level of debt are going to have less negotiating power in terms of varying the loan and the credit provider is more likely to be keen to repossess. If enough of those hit the market at one time, well surely you do not need me to go on.

  48. JC Says:

    I agree PF, Chris Joye must have some respect for Steve Keen or he wouldn’t waste his energy on him. I would imagine the same goes for Kris Sayce. That being said, Chris Joye has no problem with misrepresenting others to further his own cause (in my opinions). You don’t often see too much humility in his opinions. Keen, OTOH, is a masochist and just loves to be bullied by the heavies in the sand-pit. The only other credible commentator I know who is said anything as dire as Keen about property is Dr. Marc Faber (even though he admitted he’s no expert on Aussie property).

  49. etch Says:

    The inflationary money supply makes landbanking profitable for a period of time, until the market is saturated with landbanks. The easy credit enables suckers to pay the high prices they couldn’t afford otherwise.

    It’s a cosy deal between the major banks and the major developers.

  50. Glenn Hopgood Says:

    Hi Money morning team. I love your daily insights even though I do not always agree with all of your points. I would love to pose a question to you about house prices. But I will start with my own experience. In May 1996 I bought a house in Brisbane for $196000. In October 2004 I sold the same house for $548000. A nice little earner that helped me buy into the Sydney market when I relocated down there for work (but one cannot help but wonder what sort of crazy market causes such an increase way above the increases in average salaries). I am on a very good salary package and I save a significant portion of it (approx 35% p.a) even with a young family to support.
    I am not trying to brag here but trying to make a point. Even with all of these things in my favour, I cannot afford to upgrade from a modest 2 bedroom apartment (probably worth $550k in today’s market) to a house in the same area. House prices where I live are close to or exceeding 7 figures. My question is how can so many people afford to pay such prices. I do not buy into the housing shortage or foreign investor deregulation arguments in the papers. I saw an auction the other day when there were many active bidders (none foreign investors) that pushed a good but not sensational property up to $1.7 million! Something about this is not gelling in my mind. Either the average Australian non-first home buyer has a lot more wealth than we see in the statistics or they are taking loans for incredible amounts of money. I would understand if the former was the exception but then how can so many people seemingly “afford” such capital outlay. If it is the second and we have the housing crash that you guys continually advocate, then it will be one of the biggest financial bloodbaths in our financial history. I agree with your assessment of how relaxed credit is but I can’t help thinking that somewhere in all the myriad analyses something HUGE is being missed and when that comes to light it will be after the biggest correction in property prices we have ever seen.

  51. etch Says:

    This is what you get. When an aussie sells an asset he buys food / beer / car / consumer goods / junk.
    When a chinese sells an asset they buy a more expensive asset.
    ALSO We sell china heaps of raw commodoties as well as services such as tourism / education. we use the proceeds of this to buy t.v’s /toys / and junk that is made in china.
    When China sells finished goods to us, they use the money to buy aussie assets e.g. YOUR HOUSE. they do not buy aussie junk.
    Have a look at that before you complain. oh and buy more junk please, we chinese want more of your assets

  52. cb Says:

    Hmmm … I have the fealing that we are failing to capitalise on this article. It would be good to have some specific comments, before we move on, to some of the key claims made, such as:
    1. Has property been a reasonable hedge against real inflation, where inflation is defined as excess money hitting the economy relative to GDP?

    2. Is Sayce right in claiming that M3 alone represents the degree to which the value of the AUD has been diluted? I suggested that this is not so, as M3 should be adjusted downwards by the GDP to get a more reliable measure of real inflation. It seems to me that the CPI adjusted growth of the economy should not be counted and considered to be inflation. But what do YOU think of this?

    3. If we adjusted M3, as suggested, by a CPI adjusted GDP as a better way of calculating actual inflation, how does this affect Sayce’s numbers, and namely the gaps he says there is between house price and M3 growth?

    4. Do you think that growth in M3, or more accurately, inflation (if we can gain a more accurate measure of inflation) has anything to do with house price appreciation? Or do you think that house price appreciation is due to some other, more plausible factors, and if so, what might these be?

  53. Peter Fraser Says:

    Kevin B @ 39 – yes if a depression hits asset values will fall.


  54. The Wolf Says:

    JC @ 35

    The comment you provided from the presentation that outstanding loans to total value of housing is only 30% might be true. However, wouldn’t the more accurate and realistic measure be to count only property for which their was finance attached. It seems a little misleading to include the “value” of property for which there is no finance attached, and thus there is no debt service ratio / stress level / etc.

    It seems rather convenient to count in a significant chunk of asset value with no debt attached…

  55. The Wolf Says:

    PF @ 10

    Your comment was “the increase in value of property is twofold, first in the inflation of the value of the property itself, and second in the devaluation of the debt by that same rate of inflation. If in the meantime rental equals interest cost then voila you have a gain.”

    I am probably more than a little stupid, for investment property rental to equal interest cost, what sort of equity (eg. 20%, 30%) would you need to tip in to make this equation work. I haven’t lived in Australia for about 6yrs, but I remember it was extremely difficult to cover a mortgage payment with rental income without at least 20%-30% down.

  56. cb Says:

    The Wolf – ah, that is where negative gearing is used as a rationale for holding these dollar burning investments on your balance sheet. The typical reasoning goest something like this:
    Instead of being taxed on your income you want to use for investment purposes at your marginal tax rate, which could be 30 or 40%, you use it to service the loan, helped by the rent you collect, on a negatively geared investment property, and thus treat that portion of your income as a tax deduction. Then, when you sell your appreciating asset at a profit, you will pay tax only on half of the capital gains you realise, which itself is further adjusted downwards by the CPI. Earning an income through capital gains, in other words, is more tax effective, than it is to pay high taxes at your top marginal tax rate. Hmmm… something along those lines, anyhow.

  57. cb Says:

    The Wolf – regarding the ratio of equity vs debt question, this is indeed important, and in more ways than at first would meet the eye.
    Regardless of how you decide to calculate the ratio, it is subject to a great deal of uncertainty and potential volatility. In a housing crash, for example, the equity side of the equation will rapidly diminish, whereas the debt will stay the same.

    And while this would be bad enough all by itself, it would also hit small business’s ability for capital formation, as I have been trying to argue earlier. You cannot secure a business loan against a property with absent or greatly diminished equity. Just how much we are going to be hurt on this front in the event of a property crash will probably surprise most people, seeing that there is virtually no discussion of this aspect of the property market.

    While prices are rising, rising equity provides the economy an important avenue for small business borrowing for capital formation, but in property downturn this avenue will be cut off, and small business bankruptcies will probably go through the roof as a consequence. These in turn will hit household incomes and employment quite hard. That would be my expectation, anyhow.

  58. tel Says:

    Hi all, I am a fairly regular reader of these blogs, but a newbie when it comes to having a comment, although I have opinions often.
    This one got me thinking which lead to me not sleeping as I remembered a sticker or something I once saw, it said “he who has the most wins” or something like that!
    My question is the “most” what? The most money, property, toys or should is it something else?
    This debate is great and as has been covered the CPI etc stats we are all told are rubbish and although I don’t totally agree with all of what Kris has to say I think he is making a great point with this one but maybe we should be thinking about this more simply.
    If Kris or somebody has the time I would love to know the following, or similar, and maybe see it in a graph and the information would be great to see for a longer period than just 5-10 years for relevance (By the way I am a bit of a gold bug)
    1. Average wage – in ounces of gold.
    2. Average house price – in ounces of gold.
    3. Cost of a standard new Commodore – in ounces of gold
    4. Cost of a barrel of oil – in ounces of gold
    5. Cost of a slab of Crown Lager – in ounces of gold
    6. Cost of a families grocery bill – in ounces of gold
    If it were all in AUD’s it will answer the main question of whether we are moving forwards or backwards and will take into account the exchange rates which I think needs also to be considered.
    Based on cuurent figures (Gold = 1238.86 AUD/oz, AUD/USD = 0.8892), here is a start.
    4. you can buy 14.019 barrels of oil for one oz of gold. (77.58 USD/barrel)
    5. you can by 24.78 slabs of crown lager for one oz of gold. (49.99 AUD/slab)
    And another interesting stat is it would take 3.75 oz of gold to buy the ASX200.
    All this data would provide some relevance and if compared to other countries for housing, wages etc might tell us where we really are and have been.
    It will also provide a guide to what’s happenng to our standard of living, which is really what is important, not the BS CPI figures we are fed!
    Hope someone is interested and can help, cheers.

  59. Peter Fraser Says:

    The Wolf @ 46 – with a 20% deposit you should be positively geared. That could vary slightly, but I’m not one who believes that negative gearing is that much of a plus. Losing money is not as attractive as gaining money IMHO.

    But you need to buy well – if you don’t do that then your % return is lower and CGT may not be there for many years.

  60. The Wolf Says:

    PF, thx.

  61. BB Says:

    Another extensively abused ‘shonk’ of the residential property investment circus are the maintenance costs (ie: the costs involved in maintaining your asset like repairs and renewal of worn out components and elements of the building itself) They are of course tax deductible. Seems reasonable when compared to other ‘business’ costs but the system is absolutely rorted by many property investment owners. Apart from getting home improvement works performed on their own residences and then getting it billed as maintenance work to their investment properties I know a bloke who has investment apartments in each of the capital cities. He claims the cost of business class air fares and first class hotel accommodation to facilitate the ‘inspection’ of his investment property portfolio each year and happens to have a bit of a nice holiday whilst he is there. Thank you very much wage and salary slave tax payers and of course this wouldn’t also be a factor feeding in to the increase in price of houses for people to purchase as a home – where no associated ownership costs are tax deductible -now would it?

  62. Peter Fraser Says:

    Billy J @ 35 – looks like you are correct Billy.


    My aplologies cb I have misled you.

    Thanks Billy J.

  63. etch Says:

    cb- do you see any similarites with greeces debacle as compared to australias ?

  64. cb Says:

    etch – I do, but this far only in rather etchy terms.
    The main similarity is this:
    1. The vampire squid that is Goldman Sachs has been doing deels on the quiet with the politicians over there, and see where it got the country in a mere handful of years!

    2. Greece is not a unique case by any means. More and more countries where this abominable vampire squid has been reported to have been active, is suffering similar and commensurable fate.

    3. Goldman Sachs has been similarly doing deals over here, quietly, mostly behind the scene. It has been once reported that it will be a big player in securing financing for mega projects, such as the NBN, and goodness knows what else.


    4. The country is being whiteanted as we speak. Some of it we see, such as billions and billions borrowed on the national credit card being wasted largely on unproductive, retarded government programs, but most of it, like in the case of an iceberg, remains hidden and will only come to light when the robber barrons are ready to pull the plug on us and ring the cash registers as we go down, down, down.

    But probably they are not quite ready yet. First they will probably want us to borrow still more from them, for the NBN, and whatever else, and when they feel that we have been sufficiently loaded, they will sell the Aussie short and pull the plug on us. So, in essence, it will be the same as with the others, but with a few years of dealy.

    We will have to get the election out of the way, to be sure. Plus, China’s goose is still being cooked, and will probably not be ready for a few years yet. But when they are sent to the bottom, it will be easiest to send us with them at the same time, with the same push. When? My guestimate would be a few years only. Possibly 2013 – 2014. But what do YOU think?

  65. cb Says:

    Incidentally, there is a good discussion by Steven Keen on the latest Keiser Report. They also cover the big picture stuff, plus Keen’s expectations for Australia. It is worth watching for another opinion.

  66. etch Says:

    @ cb-64
    i think not long after the elections over ,

    then early next year, i reckon they will pull the plug

    unless as in ur theory maybe they want to push it mega maxxed out

  67. cb Says:

    etch – Yes, that is a distinct possibility – probably a 50 – 50 chance from where we stand. If Rudd stays in government and remains compliant and will keep happily borrowing and stimulating, then that will do just fine for the vampire squid, as its bloodlust will be satisfied with the monstrous fees they will be collecting from us for stitching up the big deals for this and that mad scam.

    If there is a change of government, or the government’s appetite for mad adventures goes away, then they will want to cash in on crashing the economy and the currency. Plus, an unfolding crash might just get the government to change its mind again and ask them for stitching up those mad infrastructure and goodness knows what nation building and nation saving plan.

    Either way, the prudent thing would be to be ready for these eventualities. I fail to see how or why the robber barrons would want to spare us, especially given the massive pile of savings we have in compulsory super. They will want to get their dirty hands on that by fair means or foul. Of that I have little doubt.

  68. Mark Says:


    Out of control printing presses and the assocaited inflation are not a good thing, that’s to be sure. However you haven’t convinced me that property is not a good hedge against inflation, because:

    1. M3 money supply and inflation are not the same thing. An increase in M3 is only inflationary to the extent it’s not matched by a corresponding increase in goods and services. If M3 grows at the same rate as the economy, then all things being equal we have no inflation. Of course M3 has grown faster, and we have had rampant inflation as a result. But we’ve also had some economic growth over that time, so inflation is not as high as you assume.

    2. Yes, with high inflation, any equity you have in property will have it’s purchasing power eroded over time. However the value of the DEBT is also eroded over time.

    A simple example I challenge you to refute:

    You buy a $500k rental property with 20% deposit. Rental income covers your interest costs on the $400k debt, but no more. Over 10-15 years you pay off interest only and your debt stays the same, but property price doubles to $1M – lets assume largely due to inflation. You sell your property for $1M, pay off your debt, and have $600k left. So the return on your $100k investment was 500% – likely to be higher than inflation over that time , I would have thought?

  69. Vincent Says:

    Well said Mark, and judging by the lack of a response from Kris, appears to point out the anti-property spruikers are just as guilty as the property spruikers in painting the picture. What I suspect is the truth clearly lies somewhere in between ie. while property may not be a PERFECT hedge against inflation and it’s eroding ill effects, it still beats the hell out of anything else out there, unless of course someone in money morning points out yet another great stock pick or investment fund that has outperformed everyone else in the past X years, but nevertheless has the tiny print which states “past performance is not a guarantee of future results” leaving you at a gamble at best if you’re better off or not leaving your money in property.

  70. Tax Back Says:

    Most of businessmen and employees are concerned about saving taxes. The large corporate houses hire the services of financial experts for tax planning. It is an intriguing fact that no one likes to give away considerable amount of money for paying off the variouskinds of taxes. A common man, who has to pay VAT on the various commodities, feel unpleasant to pay the income tax, with the soaring rates of almost all the commodities. How can they be justified to contribute a large amount of their income towards the income tax, because they already find it difficult to survive in the environment of growing expenses.There are various legitimate methods to handle the tax issues. It is extremely sensible to carry out the research for finding ways for getting tax back advantages. Some times, hiring the professional accountant proves helpful to get tax benefits. There are various provisions for getting relief from tax, if the business is going through financial crisis. At the same time, a common man can also avail the advantages of the leverages provided by the Australian taxation laws, for the bad financial situation. However, an individual or organization has to file the income tax return on time, and should be able to prove the exact financial status, to apply for tax return.

    The Australian Tax office allows to claim the amount of money spent as work-related expenses, which can range up to $300. It is possible to claim the $300, without giving any written proof for work-related expenses. However, many people are able to claim even more amount of tax back, if they are able to present the records of their expenses.


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