The Budget Splurge Was Old News to the Market

Did you catch the federal budget last week?

The centrepiece was income tax cuts.

And millions of Australians will benefit.

Over time, tax relief will total $158 billion dollars, for low- and middle-income earners.

And there’s immediate tax relief of up to $1080, for middle-income Australia.

In the words of the treasurer, they’re the largest income tax cuts since the Howard government.

But aside from tax cuts there was also a huge $100 billion spend on infrastructure.

More roads and rail to relieve the commuter gridlock. More carparks near railway stations and so on.

Labor too has come to the party.

Many pundits are predicting they may well form the next government come the next election.

Free Guide: How to Invest in the Massive Infrastructure Boom. Download now.

So it’s prudent to hear their plans as well.

In his budget reply, Mr Shorten not only matched coalition tax cuts, but promised higher tax relief. Along with more spending on amenities such as schools and hospitals and more.

In short, it doesn’t matter who wins.

We’ll be getting more tax cuts and infrastructure.

Just on those tax cuts, do you think Joe and Jane average will put the money into a savings account?

Or, spend it?

Here’s the stock chart of Harvey Norman Holdings Ltd [ASX:HVN]:

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Source: Optuma
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And now Myer Holdings Ltd [ASX:MYR]:

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Source: Optuma
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I think there might be the answer.

Both stocks have been on a run in the last couple of months.

But see how the market tells you?

A potential government splurge is old news to the market.

But aside from all that, you have to understand where all the gains of lower taxes and better infrastructure end up.

Not sure?

Where do the gains of lower taxes end up?

Well, let the words from former UK leader, statesman and conservative Prime Minister, Winston Churchill, clue you up. These words might have been uttered over a hundred years ago, but are still relevant today because the economic system hasn’t changed…

Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still.

…To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is sensibly enhanced.

He renders no service to the community, he contributes nothing to the general welfare; he contributes nothing even to the process from which his own enrichment is derived.

A portion, in some cases the whole, of every benefit which is laboriously acquired by the community is represented in the land value, and finds its way automatically into the landlord’s pocket.

If there is a rise in wages, rents are able to move forward, because the workers can afford to pay a little more. If the opening of a new railway or a new tramway, or the institution of an improved service of workmen’s trains, or a lowering of fares, or a new invention, or any other public convenience affords a benefit to the workers in any particular district, it becomes easier for them to live, and therefore the landlord and the ground landlord, one on top of the other, are able to charge them more for the privilege of living there.

It’s pretty simple really.

Tax cuts, more infrastructure, more planned amenities. It all does wonderful things to land price.

You must understand this process, because it will make you a better investor.

Most economic analysis you read is essentially flawed. It’s because they don’t understand the land issue.

I believe to flourish in this economic system, you must be a rentier, not a renter. You must be on the side of asset owners, in particular land. You will get absolutely slaughtered if you are a simple renting, wage earner.

This is because tax cuts or improvements in infrastructure and amenities simply express themselves as increased land values and rents.

It is something that the vast majority of economic pundits simply ignore.

For example, take the pledge in the budget to build a $2 billion fast rail from Geelong to Melbourne.

It will halve travel times between Geelong and Melbourne. It’s a huge gain for those who live in the region!

But also understand this.

It will also do wonderful things for land values and rents in and around the Geelong region.

Locations within walking distance to the station or close to a bus stop which takes you to the Geelong station will simply increase in selling price. Or, there will be an increase in weekly rents.

Every benefit acquired by society eventually winds up in the land value

It’s like Sir Winston says, every benefit acquired by society eventually winds up in the land value.

But it does show, to get lucky from improvements, you have to own in the first place. If you don’t already own, renters will simply have to pay more to live there.

Rentier or renter. Choose which side of the fence you want to be on.

On one side of the fence, improvements and society’s progress make you richer. On the other side of the fence, they make you poorer.

And one last thing.

The budget delivered last week is just one more reason why I find it hard to go completely bearish on Aussie property.

Tax cuts, proposed infrastructure and more amenities will all eventually feed into land price.

It’s likely to stabilise house prices a bit going forward.

And Australia is unlikely to enter a recession whilst all this is going on.

Nothing has changed since Winston’s day. This is the way of the real estate cycle. And this real estate cycle is on track to be the biggest of all.

Regards,

Terence Duffy,
Chartist, Phil Anderson’s Time Trader

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts


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