ERICOPOLY Posted December 19, 2011 Share Posted December 19, 2011 This is a good exchange from the DebtDeflation blog: Hatless March 22, 2011 at 7:53 am Hi Steve, Great talk as always. Just one question. Do you think there is a big difference in how everything plays out given that the RE bubble in Australia consisted mainly of bidding up existing house prices, compared to the US and say Ireland, which had a lot more additional building? I’d be interested in your thoughts on this. Cheers, Ben Steve Keen March 22, 2011 at 8:05 am | # Thanks Hatless, And yes I do think that’s a significant difference in how things will play out here–though not as the spruikers see it of course. Their argument has been that since we didn’t build as many houses here as in the US (true), there won’t be the same overhang of unsold new properties depressing prices (true). Therefore our prices won’t fall (false). What they’re omitting from their thinking is that, given that Australians borrowed more money to gamble on housing than even the Americans did, our bubble was more of a purely speculative one than theirs was. They at least did some “investment”, even if it was inappropriate to needs in the medium term. We did far less, so far more of our money went to gambling on house prices than increasing the quantity of housing. This is one reason our price bubble was more extreme than theirs, and therefore potentially has much further to fall. It also will spread the pain of a price fall more broadly. Whereas we will have less losers among property developers, we will have more losers amongst those who bought an existing property for capital gain as a retirement investment. Something like 30% of market demand came from “mum and dad investors” at the peak of the bubble. If a significant proportion of them think that the longer they hold a property, the less they’ll have for retirement, then–with a large lag–they could switch from the buy side to the sell side. Link to comment Share on other sites More sharing options...
prevalou Posted December 19, 2011 Share Posted December 19, 2011 no property tax in Australia ? http://en.wikipedia.org/wiki/Property_tax#Australia Link to comment Share on other sites More sharing options...
ERICOPOLY Posted December 19, 2011 Share Posted December 19, 2011 no property tax in Australia ? http://en.wikipedia.org/wiki/Property_tax#Australia It works differently than it does here. I live in Washington state. My property tax is based upon an appraisal of the entire property. So if I built a $50m home on my property, my annual tax bill may actually be higher than the value of the underlying land! Australia doesn't tax you on the improved value. New South Wales has a "land" tax, and if it's your primary home you get a $400,000 land valuation exemption. So if you have an $800k home but the land is worth only $400k or less, then you pay nothing in land tax. EDIT: actually that exemption might be for homes you own that are not your primary residence. I believe it may be a 100% exemption for your primary residence. They have "rates" that pay for basic services, but they don't scale up the way our property taxes do. I mean, a $2m house is not uncommon in Sydney. Here in America it would not be uncommon to pay $20k a year in property tax on that house. Link to comment Share on other sites More sharing options...
shalab Posted December 19, 2011 Share Posted December 19, 2011 Eric - are you planning to move to Australia permanently? They have what is known as stamp duty which is paid when a property is bought and it is a surcharge to the buyer. This is an old world rule that is present in Europe. I suspect this dissuades property sales and mobility as it is levied on top of the property value. From the wikipedia article.. ---------- Australia also has stamp duty, applied at the time a property is sold, by the purchaser to the Office of State Revenue. In addition to stamp duty there is also a Land Transfer Charge under the NSW State Revenue Legislation Amendment Bill 2010 (1 July 2010). The Charge will be levied as an ad valorem tax to be paid by the purchaser, for property above $500,000 in value, and is payable at the time a transfer document is lodged for registration with Land & Property Information (LPI). Link to comment Share on other sites More sharing options...
ERICOPOLY Posted December 19, 2011 Share Posted December 19, 2011 Eric - are you planning to move to Australia permanently? They have what is known as stamp duty which is paid when a property is bought and it is a surcharge to the buyer. This is an old world rule that is present in Europe. I suspect this dissuades property sales and mobility as it is levied on top of the property value. From the wikipedia article.. ---------- Australia also has stamp duty, applied at the time a property is sold, by the purchaser to the Office of State Revenue. In addition to stamp duty there is also a Land Transfer Charge under the NSW State Revenue Legislation Amendment Bill 2010 (1 July 2010). The Charge will be levied as an ad valorem tax to be paid by the purchaser, for property above $500,000 in value, and is payable at the time a transfer document is lodged for registration with Land & Property Information (LPI). Yes we are planning on moving for 2 years minimum -- it will be permanent if it works out. "stamp duty" is known as "excise tax" here in Washington state (only ours is paid by the seller): http://dor.wa.gov/content/FindTaxesAndRates/OtherTaxes/tax_realestate.aspx My house in Washington state is worth roughly $500k (or so I think) and I will have to pay 1.28% tax on it when I sell it -- that's $6,400! Link to comment Share on other sites More sharing options...
dwy000 Posted December 19, 2011 Share Posted December 19, 2011 Eric - I currently live in Sydney after moving here 2 years ago from NY. It was supposed to be a permanent decision but in all likelihood we will be moving back to the US in a year or two. It's not everything we thought it would be. We rent. The housing market here, while maybe not a bubble, is still unreasonably expensive - especially in comparision to incomes. The rental yield is about 4% (!!!!) which is even more shocking when you consider that you can easily get 6-6.5% interest on a 6 month term deposit at any bank. Note that this does not include the stamp duty in the purchase price which is paid by the buyer (5-6% of purchase price). Mortgage interest is NOT tax deductive on primary residence but is deductible for investment property. What amazes me most is the completely ingrained mentality here that housing is a great investment, always has been and always will be. I have a number of friends who have purchased "income" properties here based on that mentality. The rent obviously doesn't cover the mortgage let alone operating costs and taxes so they have to pay out of pocket each month to top up. In my view that's not an investment. Just between the stamp duty and broker fees the price has to rise about 10% just to break even on the purchase and that's with the income completely covering the investment. When I try to walk them through the math and why it doesn't make sense they simply dismiss it and say that house prices will always go up and that over a 10 year period real estate is always a good investment. One of them just kept repeating that real estate prices had doubled on average every 9 years over the past century (like this meant it was destined to continue forever). I simply don't get it. I think some of this mentality comes from the fact that Australia largely avoided the financial crisis and there seems to be a prevailing belief that they are immune to a serious downturn. I know I'll get lambasted for saying that but it really reminds me of US house flippers in 2006 and 2007 when it was believed the good times would go on forever (yes there are differences but when you hear them talk about it, it's the same mentality). Link to comment Share on other sites More sharing options...
turar Posted December 19, 2011 Share Posted December 19, 2011 It's not everything we thought it would be. Out of curiosity, what are some of the reasons? I guess besides real estate? Link to comment Share on other sites More sharing options...
ERICOPOLY Posted December 19, 2011 Share Posted December 19, 2011 Eric - I currently live in Sydney after moving here 2 years ago from NY. It was supposed to be a permanent decision but in all likelihood we will be moving back to the US in a year or two. It's not everything we thought it would be. We rent. The housing market here, while maybe not a bubble, is still unreasonably expensive - especially in comparision to incomes. The rental yield is about 4% (!!!!) which is even more shocking when you consider that you can easily get 6-6.5% interest on a 6 month term deposit at any bank. Note that this does not include the stamp duty in the purchase price which is paid by the buyer (5-6% of purchase price). Mortgage interest is NOT tax deductive on primary residence but is deductible for investment property. What amazes me most is the completely ingrained mentality here that housing is a great investment, always has been and always will be. I have a number of friends who have purchased "income" properties here based on that mentality. The rent obviously doesn't cover the mortgage let alone operating costs and taxes so they have to pay out of pocket each month to top up. In my view that's not an investment. Just between the stamp duty and broker fees the price has to rise about 10% just to break even on the purchase and that's with the income completely covering the investment. When I try to walk them through the math and why it doesn't make sense they simply dismiss it and say that house prices will always go up and that over a 10 year period real estate is always a good investment. One of them just kept repeating that real estate prices had doubled on average every 9 years over the past century (like this meant it was destined to continue forever). I simply don't get it. I think some of this mentality comes from the fact that Australia largely avoided the financial crisis and there seems to be a prevailing belief that they are immune to a serious downturn. I know I'll get lambasted for saying that but it really reminds me of US house flippers in 2006 and 2007 when it was believed the good times would go on forever (yes there are differences but when you hear them talk about it, it's the same mentality). I have a few cousins in Sydney who feel that their real estate won't go down. So I'm familiar with what you are hearing. We are looking at the Frenchs Forest area as a possibility -- about $40k annual to rent an $800,000 house. Originally I was thinking of Lindfield which is where my grandmother had her home near the rail station (her home sold in October for $2.05m). But she had a double lot so the price set a record for her street -- double lots are very rare. $1.4m is more typical. Anyhow I discovered rentals are about $70k annual in Lindfield. That home that sold for $2.05m -- my grandparents bought that right after WWII for $4,500 and never changed the house. Now that much money covers 1 month rent! Just sort of an amusing story about what you could buy in the late 1940s. Yes, that's better than 10% annualized increases for a 60 year stretch. I'm not sure how much areas like that will crash. My parents house in Los Altos Hills, CA has declined maybe 10% if that even during the past few years. And that's during our "Great Recession". The house was worth about $50k in 1970 when they bought it, then about $900k in 1990 after the big real estate boom, $2m in 2000 after the tech bubble, and it's still about $2m today. So not all areas are going to implode. I just figure looking at Australia as a whole the median price will fall considerably. Link to comment Share on other sites More sharing options...
dwy000 Posted December 19, 2011 Share Posted December 19, 2011 It's not everything we thought it would be. Out of curiosity, what are some of the reasons? I guess besides real estate? Turar - I'm conscious this is a bit off topic for this thread and I don't want to offend any Aussie's since we really have enjoyed it for the most part but..... a) it's OUTRAGEOUSLY expensive. Not just housing, everything. Food. Clothing. Furniture. Services. I find myself buying a lot of things from Amazon or similar online sites and even having them shipped here it is still less than 2/3's the local price. My running shoes I normally pay $120 for in the US are $270 here. That is pretty typical. It was cheaper to buy New Zealand apples in NY than in Sydney. Huh? When we were looking to move the A$ was about $0.66 US and everything seemed a little expensive but you figure "what the heck". Now the A$ is above $1 US which make is offensively expensive. b) the distance and time difference really gets to you. There are very small windows to call family and I feel like I'm a bit behind the times on world/US news. I can't really explain it but you just feel removed and remote. To go on vacation out of the country, unless you're doing NZ or Fiji, you're looking at a minimum 7 hr flight each way (10 hrs to Hawaii). It hits home when we spent $500 in shipping charges to send $400 worth of presents back to the US/Canada. Now, I must admit it's improved my value investing because I go to bed before the market opens and wake up just as it closes so I have to leave open orders and can't watch every tick. c) Taxes are very high and climbing. Top tax rates are about 45%. There's a 10% value-added-tax (which adds to the expensive comment above). The new carbon tax will add significantly to electricity and gas prices. d) The shopping is disappointing. We struggled with our Christmas shopping. It's getting better and this is after living in NY so take it with a grain of salt. You don't quite appreciate the quality, price and selection we take for granted in the US but it's starkly apparent when you compare here. Imagine living in a mid sized city in the US and then moving to a fairly small town. You can get everything but it's just less selection, less competition and a little more effort. e) The weather wasn't quite the utopia we had built up in our minds. Don't get me wrong - it gets very hot and the sun shines a lot, but it's not the year round shorts and t-shirt weather you tend to hear about or expect. I might be tainted by the fact that we've had a crappy summer so far. f) If you don't like rugby, you're out of luck as a sports fan. I really, really miss baseball and football. They actually have 3 types of rugby here plus Australian rules football. In summer it's cricket. A little bit of soccer. That's it. g) We miss the American "enthusiasm" for everything. I put up a bunch of Halloween decorations that would have been considered tame in the US and I got people stopping and taking pictures and in awe. They would ask me about it and as soon as they heard my accent would say "ohhhhhh, you're American" - like suddenly that explained everything. It's little but it's funny. It's a great place to live and we've had a wonderful time. We are soooooo glad we did it. But it's a bigger transition than we were expecting and we just miss a lot of things that are taken for granted in the US/Canada. Link to comment Share on other sites More sharing options...
turar Posted December 19, 2011 Share Posted December 19, 2011 Thanks dwy000, that was really helpful! Link to comment Share on other sites More sharing options...
racemize Posted December 19, 2011 Share Posted December 19, 2011 Out of curiosity, what age are you? Was this a retirement type plan? My wife and I have considering being expats at some point (e.g., for retirement), such as to NZ, so I'm very curious. Link to comment Share on other sites More sharing options...
Guest Hester Posted December 19, 2011 Share Posted December 19, 2011 Really interesting posts DWY... Link to comment Share on other sites More sharing options...
oec2000 Posted December 20, 2011 Share Posted December 20, 2011 a) it's OUTRAGEOUSLY expensive. Not just housing, everything. Food. Clothing. Furniture. Services. I find myself buying a lot of things from Amazon or similar online sites and even having them shipped here it is still less than 2/3's the local price. My running shoes I normally pay $120 for in the US are $270 here. That is pretty typical. It was cheaper to buy New Zealand apples in NY than in Sydney. Huh? When we were looking to move the A$ was about $0.66 US and everything seemed a little expensive but you figure "what the heck". Now the A$ is above $1 US which make is offensively expensive. Australian wines cost more than they do in the US too - as I found out on my trip there last month. It used to be that London and Tokyo were considered expensive cities but I met people from these cities who complained that Sydney is more expensive now. Having said that, the nice thing about Australia is that the price you see is the price you pay unlike here in North America where taxes and tips are extra. So, menu prices are about 40-50% more than in Vancouver, adjusted for the 30% taxes and tips you have to add on here, the difference is not so great. One positive you forgot to mention - you get great coffee in Australia, very un-Starbucks. Btw, do you feel that Australians are more tuned in to what is happening in Asia (China in particular) and the pace of change there. Although people are more aware these days, I feel that many North Americans still haven't grasped the significance of what is happening in Asia - it's frustrating to see the petty bickering that goes on here that is so parochial. Link to comment Share on other sites More sharing options...
dwy000 Posted December 20, 2011 Share Posted December 20, 2011 You're right OEC, the coffee is fantastic. You can't get a cup of regular (filtered) coffee but if you're a fan of espresso based drinks it probably compares with the best in the world. Racemize - I'm mid-forties with a young child and it was supposed to be a quasi-retirement thing - ie move there for a couple of years, possibly permanently, and live off investments while figuring out what we wanted to do next. The ideal would be to live 6 months in the US and 6 months in Australia/NZ but that's tough with kids and even more expensive. Note the taxes are a pain in the butt. Australia year ends June 30th and you have to file both US and Australia. It's a nice lifestyle here. I don't mean to be overly negative. Link to comment Share on other sites More sharing options...
dwy000 Posted December 20, 2011 Share Posted December 20, 2011 Sorry OEC, I forgot your second comment. Surprisingly no - I don't think they are necessarily more in tune with what's going on in Asia (ie China) than elsewhere in the world. I find the coverage on CNN and the BBC to be far superior than the local coverage. Most of that is likely due to the overwhelming quantity of news in the US. As an example, everybody here immediately turned to CNN and BBC to get their coverage of Kim Jung Il's death. I think there is a reluctant acknowlegement that as China goes so goes Australia given the importance of the mining industry to the economy but I almost never hear about bubbles or major downturns in China. Link to comment Share on other sites More sharing options...
shalab Posted December 20, 2011 Share Posted December 20, 2011 Australia does have what is know as the "age pension". The payment seems pretty low by U.S standards even going with U.S dollar parity. I am assuming the government pays for health care there too. http://www.centrelink.gov.au/internet/internet.nsf/payments/age_rates.htm Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 9, 2012 Share Posted January 9, 2012 This is an outstanding paper: http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf Myth, What (if anything) do you make of the 7% vacancy rate in Melbourne? See page 21. Nice quote on page 24: The question remains - if there is a housing shortage, why are rents not increasing? There can be two possibilities: either the rental market is fundamentally broken and there is no link between demand, supply and price, or there really isn‟t a housing shortage. Link to comment Share on other sites More sharing options...
Myth465 Posted January 11, 2012 Share Posted January 11, 2012 Thanks alot for the paper, it looks well done. Regarding the vacancy rate, I tend to agree with it. Every debate I have had with an Aussie though, has had them bring up the fact that so and so many people are moving to Oz each year. There is probably a projected shortfall, but thats based on growth continuing, and Oz being the lucky country for another 2 decades. I am not sure if that is possible. I firmly believe there is a housing bubble here. Its not as bad as I thought it was originally, and in Melbourne at least the Inner Suburbs prices probably wont fall too much, but I still think there is a bubble. Being from Texas its hard to understand Class A realty housing. We have unlimited amounts of space and a population who has no problem driving an hour to work. In Oz most of the major cities can grow, but they really dont do urban sprawl well, and its too hard to get to the CBD using a car if you are far out (or close in). The major reason I believe there is a bubble comes from talking to locals. They have a blind and unbend-able faith in realty. No price is too much. Everyone thinks the path of wealth is via realty, and most people I have come across want to buy a house. The issue though is I cant say if it will burst, how it will burst, or when it will burst. We could have a US / Japan situation, or a WMT / MSFT sitaution (sideways valuations for 10 years, with continued growth in salaries / earnings / incomes). Hell we could have both with a crash in the outer suburbs and sideways trading on the inner ones. The paper is quite good and quite comprenhensive. I am about 20% in, and plan on finishing it and talking to a few of my friends who works in property about it. A friend who works in property says that the commercial side yields about 8%. This surprised me at frist, but makes sense with risk free bonds trading at 4% - 6%. I dont think anyone really cash flows on the residential side, at least in the cities. Rent vs. buy comparisons just seem too out of wack for me to see how people could be making cash. Alot of the houses in the city are really old lots with extremely an low basis or a fully depreciated ones. Those guys are making a killing, but I dont see how you buy a place, and pay off the loan on these prices. Where I live is actually a tear down. The guy bought a huge lot in an inner suburb, tore the old house down, built 2 townhomes, and rents both out. He might make out ok after incentives and taxes, but I think he is just braking even the first 10 years or so. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 11, 2012 Share Posted January 11, 2012 Its not as bad as I thought it was originally, and in Melbourne at least the Inner Suburbs prices probably wont fall too much, but I still think there is a bubble. Being from Texas its hard to understand Class A realty housing. We have unlimited amounts of space and a population who has no problem driving an hour to work. In Oz most of the major cities can grow, but they really dont do urban sprawl well, and its too hard to get to the CBD using a car if you are far out (or close in). I'm finding nice suburbs in Sydney where a modest house rents for about $70,000 per annum, or a 5% gross rental yield over market asking prices. This is not much different from the San Francisco Bay Area real estate market. Here is a typical house near where I grew up (I grew up in Los Altos Hills): http://www.realtor.com/realestateandhomes-detail/1681-Kensington-Ave_Los-Altos_CA_94024_M16447-11083 It's just a modest 1953 rambler selling for $1,649,000. That equates to roughly a 5% gross rental yield. No different from Sydney really. Link to comment Share on other sites More sharing options...
biaggio Posted January 11, 2012 Share Posted January 11, 2012 How about moving to Malta...looks beautiful. Close to Europe. Housing probably cheap. Personal Tax = 15%. Low Corp Tax (claimed in article below). If you re going to manage your $$$ you can do it from their + travel the world, enjoy life,etc (The rest of us have to stay here in North America and earn a living) "Hey Hedge Funders, Here Are 10 Reasons You Should Move Your Firm To Gorgeous Malta" Read more: http://www.businessinsider.com/10-reasons-to-move-your-hedge-fund-to-malta-2012-1#ixzz1jC9MeE7a Link to comment Share on other sites More sharing options...
Guest Dazel Posted January 19, 2012 Share Posted January 19, 2012 http://www.bloomberg.com/news/2012-01-19/australian-employment-unexpectedly-falls-currency-drops-on-rate-cut-bets.html Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 Eric - I currently live in Sydney after moving here 2 years ago from NY. It was supposed to be a permanent decision but in all likelihood we will be moving back to the US in a year or two. It's not everything we thought it would be. I just discovered a whopper of a deal breaker for me with respect to moving to Australia: 4. Will the accumulated income from your IRA be included in your taxable income as a resident of Australia? Yes. source: http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/35498.htm Link to comment Share on other sites More sharing options...
Myth465 Posted January 20, 2012 Share Posted January 20, 2012 Eric does this materially change things or just make you think more about it. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 Eric does this materially change things or just make you think more about it. Well I'm numb with shock just thinking about it right now. They won't touch a 401k because it is employer-sponsored. However I already rolled my Microsoft 401k into an IRA long ago (four years ago). That rollover makes it subject to their FIF (Foreign Investment Fund) rules. Ironically it's because I'm a citizen that I have to pay this tax -- if I were just an American staying on a temporary visa I would be immune up to 4 years. So my citizenship is standing in my way. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 20, 2012 Share Posted January 20, 2012 One thing I might try is to roll my Roth IRA into a Roth 401k that has employer sponsorship: http://www.fivecentnickel.com/2010/04/28/roll-over-ira-into-401k/ Then the money would be exempt from the FIF rules. :D Link to comment Share on other sites More sharing options...
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