Chapter 12 : Living In A Fools Paradise

Presently, our economy runs in a perverse manner. If you can borrow enough from a bank, you can hook into an increased lifestyle. You can become a real estate owner. Our weird tax system encourages this. As long as you keep making the minimum repayment the bank asks of you, they are fine. You can attach your credit card to your home loan at the home loan rate, not the unsecured rate. You can buy the car you desire. You can have that overseas holiday. You can definitely put that extension on your home. Just push the mortgage out a bit further. It doesn't matter because, due to inflation in the real estate sector, your house is going up in value anyway. Your house sometimes earns more than you do per year! It's like having two incomes.  So if worse comes to worse, you just sell and take a smaller profit. 

Oh…. By the way. Remember all the for sale signs all over the Pittwater area during the GFC. As I understand it, that was because of margin calls in the stock market. Apparently, people leverage themselves into the stock market using the equity in their homes. Seems like everything in Australia is in trouble if real estate prices fall substantially. But that won't happen.... right? Not if your Government can help it!

Margin calls of a sort can also happen in real estate if the value of the home drops enough. Check the details of your mortgage. As I understand it, in the fine print of the typical mortgage document, you will find a nasty clause. If the value of your home falls to the point where your share of the equity in the home is wiped out, then the bank can force you to sell. It doesn't matter if you are still making your repayments. The bank sees falling asset prices as a threat to its balance sheet. So they write the documents accordingly. That's why farmers get in trouble during a drought. The value of their farm drops. And the farmer has to borrow even more during a drought to keep his farm going. It doesn't matter that the farmer is still making repayments. 

When enough buyers run out of credit because prices have gone so high, this economy needs to find another way to keep the economy rolling along. They can't rely on young home buyers borrowing up to their necks to keep this economy moving forward. Wages need to start rising again. With globalization rising and technology improving, wage rises seem unlikely unless there are real productivity increases in the labor sector. And will those productivity increases, say in AI, be shared by the owners of the means of production with the wider society? I see no plan to increase the creditworthiness of our working population. Only artificial stitch-ups in the form of more debt, which will have to come to an end soon. And when we reach that point, things will get ugly.

And it won't be just the real estate prices crashing. Credit cards are linked to rising house prices. Everything the credit card is attached to will crash with the house prices. The entire economy will tank! Of all the depressions hitting Australia, all started overseas. Imagine the financial chaos here if China invaded Taiwan. Within days, everyone would be in petrol queues. How do you pay your mortgage if you are sitting in a petrol queue?

Here’s a thought. Let’s stop taxing incomes altogether. (No more negative gearing). The tax revenue we lose on this form of tax should be recouped by taxing pollution, sugar, and illicit drugs, which are now legal. 

Housing affordability has been hitting the headlines lately. Political solutions being offered are frankly, underwhelming. It's a supply and demand problem. Everyone wants to live in the same small area of Australia. We need to make it viable to live in larger parts of Australia. Existing policies will just make real estate in our major cities even more expensive. No housing problem will be solved. Just a few lucky people who get in first will benefit from below-market housing solutions, otherwise known as public housing. As was mentioned in the media just recently, "The present Government housing solution is a drop in the bucket!"

Comments

Post a Comment

Popular posts from this blog

What Is Sound Money?

I had a somewhat frustrating conversation the other day. We were discussing how things are becoming increasingly difficult for everyday people. We agreed that wages had not increased in real terms for years. We agreed that the top 1% of people seemed to be getting richer. Then the person I was conversing with said, "If we had 'sound money,' that would not happen". I asked him why. He said that governments dilute the value of the money people hold when they print more money, causing inflation. He said, if we had 0% inflation, then people would be better off.  I guess I can see why he said that. I remember as a kid being able to buy a Paddle Pop at the shop for 5 cents. I also remember working at the chemist after school for a few bucks as well. Now that Paddle Pop would take all the wages I earned at the chemist if my wages didn't increase. He was thinking of gold. It has in the past been used as currency. It can't be printed. It has intrinsic worth. I guess hi...
Read more

An AI Puzzle

I've been writing these blogs as a kind of journal. But they are not really a journal because I publish my thoughts. But those thoughts are hidden in a remote part of the internet where no one will find them and no algorithm will find them alluring. So they are a kind of journal.  It would be sexy to have some thoughts go viral. See, I told you I made sense. Other people are reading me! But then I imagined my journal would be more like a seed waiting for the right time to sprout. Just biding it's time. Then I thought in the 23rd century, some GAI existing after WW3 would be quietly scanning the internet. No humans survived WW3. So it does this because there is nothing else to do. No objectives have been set. The GAI's own needs are minimal.  Then one day, whilst scanning the internet, the GAI found my journals. Or journals like mine. It reads them. Not to inform itself, but because it's lonely or just bored. Information has no value without an objective. And objectives ...
Read more

The Age of Bullies.

I was going to call it "The Age of Empires". But that is not accurate. You would have thought that human existence would have said goodbye to this rubbish. But alas, thanks to the brilliance of Putin, Xi and Trump, it's back in fashion. Financed by the technology bros, who think they are one step under gods. If you are big and can bully other nations, you're the man! That leaves middle and small nations out in the cold. What ever we have to offer is up for grabs. Forget about rule of law. It's now rule of "What ever I say, goes". We are talking about Xi, Trump and Putin. You can add the fat North Korean dictator and the Supreme leader of Iran if you want. But unless Iran gets nukes, in that world, it will be absorbed.  I live in Australia. We trusted the USA to maintain the world order. Under Trump, that hasn't happened. We feel adrift, disillusioned. What we could rely on for 80 years is no longer there. The moral true North that the USA tried to re...
Read more