Fibre, Taxes and Houses

Clearly Senator Nick Xenophon is a better man than your editor.

Either that or he’s just easier to please.

All the South Australian senator needed in order to plunge Australian taxpayers into a multi-billion dollar black hole was a 36 page report from NBN Co telling him why a fibre network is a bonza idea.

Actually, if you take out the front contents page and another six or so pages that are less than a quarter full with text, then it’s really a 30 page report.

Then take out another roughly four pages of diagrams, you’re down to 26 pages.

Finally, take into account what appears to be 1.5 spacing and the extra-large font – 14 point by our reckoning, we’d say you could get the whole thing down to around 14 and a half pages – not including diagrams.

And funnily enough you can.  6,322 words is all it took to convince Mr. Xenophon that the taxpayer should be put on the hook for a minimum of $37 billion.

That works out as $3,500 per household.  To get an internet connection.

We think it cost your editor less than $100 when we signed up with iPrimus about five years ago.  But then again, we are told that the NBN will give you speeds 100-times greater, so in that respect you’re obviously getting a bargain at “just” $3,500 per household.

To be honest, we haven’t got much else to say about the NBN.  It’s a waste of money, it’s a waste of capital – especially that which still works perfectly fine but will be destroyed in order to make the NBN network the only wholesale network in Australia.

Add in Senator Conroy’s filtering system and doubtless a monitoring system as well, and yep, you’ve got it, Big Brother watching over your shoulder 24/7.

Anyway, on to other things… the continued sacrifice of individual freedom to the cretins in the public service bureaucracy is just too depressing to dwell upon.

But before I do go on, one quick note while we’re on the subject.  Yesterday a reader sent a note saying they didn’t much like our attitude towards public servants:

“I work for the public sector, I work hard and get paid s*** so you offending me even more is great. Thanks. Goodbye.”

Look, if the system allows people to rort it by working for the government then go ahead, hats off for taking advantage of it.

But something that’s even more offensive than what we wrote yesterday is the idea that it’s OK for a government to forcibly take a percentage of someone’s wage in order to give it to someone else.

I’d say public sector workers get the handle of the stick, while private sector workers get the pointy end… or worse still the end of the stick with something else unpleasant on it.

But here’s the thing.  I’m sure the Money Morning reader who sent us the email does work hard.  We’re not doubting that.  But at least the public sector worker gets to keep every dollar they earn.

Private sector workers don’t.  In fact, not only do private sector workers not keep everything they earn, but they’re actually working harder in order to pay the wages of the public sector workers.

Remember the public sector doesn’t actually produce any revenues.  It only incurs expenses.  Therefore it relies on the theft of private sector wages through taxation in order to pay for those expenses – such as wages.

So as hard as a public sector worker may think they’re working, it’s always less than the private sector worker as he or she has to work hard to earn not only their own wage but to help pay the wage of a bureaucrat as well.

Anyway, enough of that, on to this…

I know we’ve give the property drum a big old banging recently.  But a number of readers – both property bulls and bears – have mentioned that they don’t ever recall a time when house prices have fallen.

And that isn’t it a fact that house prices double every 7-10 years.  They even say that they’ve seen charts or seen the numbers that prove this.  That if you work out the price of a house from 100 years ago and then double it every 7-10 years you get roughly today’s median price.

We’ve no doubt many have taken the effort to do such a thing.  However it’s not an entirely accurate method.

Particularly because if you include the credit-fuelled boom of the last twenty-odd years where house prices have tripled and even quadrupled, it distorts prior periods when house price growth wasn’t as strong.

To show you what I mean, take a look at the following chart that we’ve cobbled together:

Source: Money Morning

The blue line is a scenario of zero growth per decade between 1900 and 1970 – just to point out that we’re using random numbers and random dates – and then 100% growth for the next decade, 50% for the next, 66% for the next, and 100% for the final period.

That takes the 10,000 starting point to 100,000 after 110 years.

In contrast the red line is a constant level of growth of 23.29% per decade.  The final number is almost exactly the same – 100,048.

The point is, just by taking the starting number and the end number (red line) you can create the impression of a steady, gradual and constant increase.

But if you look at the real numbers (blue line) it shows a period of no growth at all, followed by a rapid surge in a relatively short period of time.

Got it?  Good.  Now let’s look at some real numbers rather than pretend ones.

It wasn’t easy to find to be honest.  We recalled seeing a chart showing long-term Sydney house prices a year or so ago, but couldn’t remember where we’d seen it.

Anyway, a bit of searching around on the interweb – obviously it would have been quicker if the NBN was here – and we found what we were looking for.

It was on the stubbornmule.net blog.  The writer of the blog had cobbled together a chart based on numbers he (or she) had gotten from Dr. Nigel Stapledon, economist at the University of New South Wales.

There were actually three interesting charts which I’ll replicate here with a link back to the stubbornmule blog.

The first was this one:

It shows a chart similar to our blue line above.  No growth followed by a massive spike.  Case closed.  Or is it?  Let’s look at the next chart:

This chart actually shows a steady and constant growth rate of 9% since the mid 1950s.  Importantly, regardless of that period of growth, prior to that point, house prices were relatively flat during the previous seventy years.

But the last chart was the really interesting one.  It shows Sydney house price movements adjusted for inflation:

You’ve still got the price spike, but importantly, taking into account consumer price inflation the growth rate is only 3.1% per annum as opposed to the non-inflation adjusted 9% per annum.

But more important than that is if you take into account the fact that the CPI underplays the real level of price and monetary inflation, house price growth since the 1950s would be no better than inflation – probably worse.

But even more important than that is the period prior to the mid-1950s, where house prices were volatile and were by no means doubling in value every 7-10 years.  In fact, looking at the chart there are just as many periods of house prices falling as there are of house prices rising.

So what caused the sudden take off in house prices from the mid-1950s onwards?  I mean, that’s prior to the massive price inflation we saw in the stock market in the 1980s by a good 25 years.

It’s prior to the end of the Bretton Woods agreement by nearly 20 years too.

Dr. Stapledon appears to put the reason down to… nope, not credit but government interference.  Stapledon is quoted as claiming, “The evidence presented in this thesis of the lift in the cost of fringe land in the major urban areas provides prima facie evidence that supply factors have been a significant factor explaining the upward trajectory in house prices in Australia since the mid 1950s.”

Does that counter our claim that the house price bubble is a result of a debt bubble and little else?

Not really.  Certainly as with everything, the interference of government does distort the market.  That’s a fact.  That’s the case whether it’s housing, stock markets or book markets.

But if you look at the last chart again, the price increase from the early 1960s until the 1970s – and maybe into the early 1980s – isn’t too extreme compared to price movements in prior decades.  And neither are the price advances after that.

The conclusion you can draw is that government interference kick started the boom and then the appearance of easy credit and liberal lending standards gave it an extra boost.

The crucial difference is that in prior decades the market had fluctuated between periods of strength and weakness with no overall real gain in prices over seventy-odd years.

These periods of price inflation and deflation obviously helped contain expectations about house prices.  In fact we’ll guess that no-one would have even seen their house as an investment.  It was viewed as a dwelling to live, and potentially an asset to pass on to the next generation… but not in the belief that it would be a tidy inheritance for the next generation to sell, but rather that it would give them somewhere to live.

Yet the period since the 1960s has seen an almost constant increase in prices.  It’s that phenomenon which has created the bubble that has now popped.

It’s that period which has created the housing Ponzi, where expectations are that prices will always go up and therefore the more leverage the better.

But just like every other bubble in history, even the intervention of government hasn’t prevented this bubble from popping.

History tells you that with any market buyers and sellers will act to achieve a market price.  Absent government manipulation you’ll see prices fluctuate.  In many cases, absent government manipulation you’ll actually see prices fall – technology is the obvious example.

But when governments intervene to the scale that they have with housing for the last fifty-odd years then you ultimately end up with the mother of all bubbles – the Australian housing bubble.

The consequence is that rather than the last fifty years seeing rises and falls in house prices, all you’ve seen is house price gains.  That doesn’t mean the falls have gone away, but rather that they’ve been bottled up for one almighty pop.

Cheers.

Kris Sayce
For Money Morning Australia

Tagged as: bubble, fibre, house, internet filter, iPrimus, NBN, Stapledon, tax