Australian Property Bubble....

[ERICOPOLY]

Suppose you buy a house in Texas when you are 30 and you live in it until you are 85.

 

You wind up paying 1.8% every year in property tax.  So you buy the house twice.

 

They don't assess property tax on your primary home in Australia.

 

So like, when you Texans say Australia has this bubble and that bubble, look at the bubble world you live in.  Every 10 years you have to pay another 18% for your house.

 

Sickeningly true. It seems to compound capital, you need to do your best to avoid purchasing real estate.

 

I live in Texas, in an area with crazy demand for housing at the moment (Austin).  I calculated all in costs for the house we have a mortgage on versus renting and then investing the principal amount.  I realized that the low interest rates + leverage from the mortgage was hard to beat from an investment standpoint, especially when taking into account the cost to rent.

 

Here is what I calculated:

 

cost to own = interest portion of mortgage + insurance + taxes + other costs

versus cost to rent = monthly payments

 

For a comparable place, we would be paying much more in rent, so we would not get the increase in equity every month (excluded from the cost to own above).

 

then comparing possible appreciation of the home leveraged 4:1 (I own 25%) versus my own investment returns using the 25$ of the house, which are unlevered, I was concerned that I couldn't match the levered returns.  Additionally, the house diversifies the investments and the low interest rate is somewhat a hedge against inflation.

 

Prices are currently very high in Austin for real estate (and rent), so if someone has a better way to think about the above, I'd be glad to hear it; I kind of wanted to sell the house this summer and move downtown.  I think it is just too cheap to live in my house right now, versus renting.

 

 

Nutty!  2.2% of the current market value.

 

So if you bought the following home in 1972 and raised your kids in it, you are now paying $22,000 a year in property tax:

 

http://www.realtor.com/realestateandhomes-detail/3505-Country-White-Ln_Austin_TX_78749_M79473-84242?row=6

 

How much social security do you have left after you pay that $22,000 of tax?

 

There is something missing from the state flag of Texas:  A hammer and sickle!

 

You might be 90 years old today and bought that home when you were 49, thinking you would retire there on your pension.  Now the state says it's theirs because you can't pay your taxes and they come with the sheriff to kick you out of the home you already bought and paid for!

 

[persistentone]

Without providing a lot of detail, here is my 10K foot view of Australian real estate:

 

1) There was an unprecedented boom in commodity values based on Chinese capital expenditure spending.  This resulted in a huge economic boom, but more important to Australian real estate this resulted in unprecedented employment.  Senior mining techs were routinely earning over $200K/year AUD.

 

2) Rich salaries meant that there was huge competition for real estate, with the result being that the real estate became a large bubble.

 

3) The mining boom is over.  China got smart about its spending and unrealistic capex spending, and that is all being drawn down slowly.  Commodity prices are unwinding, and there are many Australian mining firms and mining supply firms that took on too much debt and will go bust.

 

4) As the mining sector in Australia unwinds, employment levels and salaries for those employed will decline.  That will result in less money for real estate and declining consumer real estate prices.

 

Unlike in the US, where the boom was due to an incredible fraud within the financial industry, the boom in Australia is from people who really intend to own real estate long term.  They typically have a 20% minimum downpayment, so they have too much invested to easily walk away, and none of that debt is non recourse debt.

 

I believe that the unwinding of real estate pricing in Australia is unlikely to be in a sudden collapse.  Rather, it will be a long-term drawn-out secular event that might take six or more years to work out.  I suspect that shorting a bank is likely to be a very painful experience, because the banks pay high dividends and it's not clear that you will see any major price movements down in the next two years.

 

I feel that shorting mining companies and mining service companies on ASX is a better strategy.  There has been a big recovery in values of those firms from their collapse earlier this year.  Would love to see any work that anyone has done on that, or better yet identify a high quality newsletter that focuses on ASX shorts.  I would be looking for mining services firms in gold and copper and coal sectors that took on lots of debt that cannot be serviced in a long term secular decline of the mining sector.

[racemize]

Nutty!  2.2% of the current market value.

 

So if you bought the following home in 1972 and raised your kids in it, you are now paying $22,000 a year in property tax:

 

http://www.realtor.com/realestateandhomes-detail/3505-Country-White-Ln_Austin_TX_78749_M79473-84242?row=6

 

How much social security do you have left after you pay that $22,000 of tax?

 

There is something missing from the state flag of Texas:  A hammer and sickle!

 

You might be 90 years old today and bought that home when you were 49, thinking you would retire there on your pension.  Now the state says it's theirs because you can't pay your taxes and they come with the sheriff to kick you out of the home you already bought and paid for!

 

Looks like that house was just built or something strange is going on; here's the line about property taxes from the same page:

 

2012 $2,616 $126,150 + $3,658 = $129,808  <---- assessed value

 

In any event, we don't have income taxes, which is why property taxes are so high.  Seems like quite a bad deal for retirees though.  I'll probably move somewhere with income taxes for retirement.

[ERICOPOLY]

They typically have a 20% minimum downpayment, so they have too much invested to easily walk away, and none of that debt is non recourse debt.

 

Florida got into a lot of trouble -- it too is full recourse.  But it's been one of the worst markets we have.  So I feel like the recourse/non-recourse argument is full of holes.

 

[ERICOPOLY]

So let's say you buy a $500,000 home in Texas, and pay 2.2% tax on it every year.

 

You've got a first year tax bill of $11,000 which will grow every year at the rate of increase in the market price of your property.

 

So...

 

How much money do you need to put in an extremely conservative fund that generates 2.2% income every year to service the tax?  And that 2.2% yield is going to predictably rise at the pace of the market value of your home?

 

This has got to be one hell of a blue chip investment!  You probably need to set aside at least another $500,000 more in this investment fund just to be sure that it will service the tax in perpetuity.  But again, where is this investment to be found?  Well, probably have to buy your neighbor's house too and rent it out.

[Myth465]

Suppose you buy a house in Texas when you are 30 and you live in it until you are 85.

 

You wind up paying 1.8% every year in property tax.  So you buy the house twice.

 

They don't assess property tax on your primary home in Australia.

 

So like, when you Texans say Australia has this bubble and that bubble, look at the bubble world you live in.  Every 10 years you have to pay another 18% for your house.

 

Property tax though really just funds schools - Texas has no state income tax. Strangely enough I dont see property tax as a housing expense. Its more of a general tax, similar to a medicare levy, gas tax, or anything else. Property tax is embedded in rents so pretty much everyone pays it. Remove property tax, and add back a higher sales tax or

 

Regarding real estate, I think RE can make a good investment if you can find something that cash flows. You can get a great cash flow return on properties in Houston

[ERICOPOLY]

Suppose you buy a house in Texas when you are 30 and you live in it until you are 85.

 

You wind up paying 1.8% every year in property tax.  So you buy the house twice.

 

They don't assess property tax on your primary home in Australia.

 

So like, when you Texans say Australia has this bubble and that bubble, look at the bubble world you live in.  Every 10 years you have to pay another 18% for your house.

 

Property tax though really just funds schools - Texas has no state income tax. Strangely enough I dont see property tax as a housing expense. Its more of a general tax, similar to a medicare levy, gas tax, or anything else. Property tax is embedded in rents so pretty much everyone pays it. Remove property tax, and add back a higher sales tax or

 

Regarding real estate, I think RE can make a good investment if you can find something that cash flows. You can get a great cash flow return on properties in Houston

 

State income taxes at least make more sense because they tax you in the year you make the money.  They take it right out of your paycheck before you blow it on a bad investment, a new car, gambling, drinking, whatever...  you settle the bill when you can afford to, in proportion to your means of income.

 

Where did the money come from to buy the house in the first place?  Income... after-tax income.

 

A lot of people work and retire with their only asset being their house (paid off).  So that is the sum total of all of their after-tax savings.  And then they just keep taxing that same pot of money over, and over, and over again.

 

I'll tell you why it's messed up -- once you retire, where does the cash flow come from to service the ongoing tax bill?  That's just the thing... replacing the property tax with an income tax would give people a secure retirement by allowing you to plan what your expenses will be.  You can plant a little garden, walk to the stores (get rid of the car), cancel cable TV.... but the property tax is the thing that just keeps coming after you every year, and keeps rising with property inflation. 

 

[hyten1]

eric i hear your gripe about property tax, i hate it too ... but

 

- who will be paying for all the services that you use, after you retire (roads,  fireman, cops, etc etc.). will sales tax alone cover it?

 

- another way to look at it, is compare to renting. i mean you have to live, unless you decide to hide out in the woods and start your own little society, you have to live somewhere, i think the better way is to compare to renting. owning vs renting, that is how i always compare my first property that i live it. now for real estate investments, that is another story

 

 

hy

[turar]

Regarding retirement and property taxes, some states have senior exemptions and other perks for homeowners over 65. E.g. in Georgia, you don't pay any property tax if you're over 65, AFAIK. Other states, you don't pay school portion of the tax, or get up to a certain amount back.

 

And anyways, once baby boomers start retiring en masse, they will make sure to turn the laws to their advantage and tell the school districts to eff off, since they don't have any school-age kids no more. Fun times ahead. :)

[ERICOPOLY]

...

I'll tell you why it's messed up -- once you retire, where does the cash flow come from to service the ongoing tax bill?  That's just the thing... replacing the property tax with an income tax would give people a secure retirement

...

 

One thing that is positive about property taxes is that people who can't afford to pay the tax can sell the property and move to an affordable place.

 

This keeps the properties cycling through the system. A low ( or non-existent ) property tax causes old world problems ( ala the lords and counts of England who keep passing their titles and land to their heirs) which I think is not desirable.

 

Australia has a land tax, but it only applies to the land value.  Plus, everyone is exempt for their primary home, and you get a $400,000 land value exemption which allows you to have a small holiday home without taxation.  But that land tax is only for land, it doesn't apply to improvements.

 

So that fixes the argument about people hoarding parcels of land all over the place -- if you try that in Australia, you are hit with the land tax.

[ERICOPOLY]

- who will be paying for all the services that you use, after you retire (roads,  fireman, cops, etc etc.). will sales tax alone cover it?

 

The have roads, fireman, cops, etc... etc... in Australia too.  They have high sales taxes, high income taxes, etc... etc...  But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income.

 

So when you can best afford the tax, you pay it then.  They don't prey on the weak broke homeowner like a sick society.

[hyten1]

eric, i hear and i agree in the sense that the system is prob not 100% fair, nor is it the best system

 

but at the end of the day the cost of society needs to be paid, how the gov get that money definitely a complicated topic.

 

i mean imagine a world were everyone or close to everyone has retired. now how will this society fund its expense (sales tax? capital gains tax?)

 

in an ideal situation the gov should've save up in prior years in anticipation for all these retiree and use the saving to fund the society, but we all know that doesn't happen. gov gets paid, they spend it pretty much right away and then some.

 

 

how do gov best get the money they need to pay for the needs of the society?

 

also its important to remember you have to live somewhere, and living has a cost attach to it. that is why the property you live in to me is not truely an investment. i think people forget that (i am not saying you are)

 

 

 

hy

 

- who will be paying for all the services that you use, after you retire (roads,  fireman, cops, etc etc.). will sales tax alone cover it?

 

The have roads, fireman, cops, etc... etc... in Australia too.  They have high sales taxes, high income taxes, etc... etc...  But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income.

 

So when you can best afford the tax, you pay it then.  They don't prey on the weak broke homeowner like a sick society.

[ERICOPOLY]

There are no expenses to pay if everyone is retired.  No police, no firemen, no teachers.  No property tax collectors.  No prison guards.  Nobody on temporary unemployment.

 

eric, i hear and i agree in the sense that the system is prob not 100% fair, nor is it the best system

 

but at the end of the day the cost of society needs to be paid, how the gov get that money definitely a complicated topic.

 

i mean imagine a world were everyone or close to everyone has retired. now how will this society fund its expense (sales tax? capital gains tax?)

 

in an ideal situation the gov should've save up in prior years in anticipation for all these retiree and use the saving to fund the society, but we all know that doesn't happen. gov gets paid, they spend it pretty much right away and then some.

 

 

how do gov best get the money they need to pay for the needs of the society?

 

also its important to remember you have to live somewhere, and living has a cost attach to it. that is why the property you live in to me is not truely an investment. i think people forget that (i am not saying you are)

 

 

 

hy

 

- who will be paying for all the services that you use, after you retire (roads,  fireman, cops, etc etc.). will sales tax alone cover it?

 

The have roads, fireman, cops, etc... etc... in Australia too.  They have high sales taxes, high income taxes, etc... etc...  But these are all things that tend to cost you less when you are in the dumps financially -- you don't pay sales taxes when you have no money to spend, and you don't pay income taxes when you have no income.

 

So when you can best afford the tax, you pay it then.  They don't prey on the weak broke homeowner like a sick society.

[shalab]

> So when you can best afford the tax, you pay it then.  They don't prey on the weak broke homeowner like a sick society.

 

There are some programs available in most places for the elderly to maintain their homes but it is not ideal. In my place, the government can confiscate my property if I dont pay property taxes for three years.

 

I went looking around to see where my money goes and if it can be optimized. I started with the city and then went to state. I looked at their budgets - surprising thing for me was that 60-70% of the money goes to personnel costs, benefits and pensions.

 

IMO, I specifically think the benefits and pensions need reforming in the government. However it is an uphill task with way too many vested interests. The public sector benefits + pensions + pay is out of whack with the private sector and significantly so when you take into account the risk of unemployment.

 

 

[locatevalue]

So let's say you buy a $500,000 home in Texas, and pay 2.2% tax on it every year.

 

You've got a first year tax bill of $11,000 which will grow every year at the rate of increase in the market price of your property.

 

So...

 

How much money do you need to put in an extremely conservative fund that generates 2.2% income every year to service the tax?  And that 2.2% yield is going to predictably rise at the pace of the market value of your home?

 

This has got to be one hell of a blue chip investment!  You probably need to set aside at least another $500,000 more in this investment fund just to be sure that it will service the tax in perpetuity.  But again, where is this investment to be found?  Well, probably have to buy your neighbor's house too and rent it out.

 

I agree 100% and most of people dont get it, Property tax is hidden tax and it hits everyone living here in Texas either directly by owning or indirectly thru renting but it really hurts when you dont have any income mostly after you retire. Thats one other reason i bought a second small home that i bought if i plan on living here for next 50 years then after my kids move out i can move to smaller and rent the bigger home but if possible its better to retire somewhere else and get property income from these homes if they are giving +ve cash flow. I tell everyone who plans to retire here and are currently buying 4k sq ft home which they dont need , but can afford now on their current high income but most people dont get it.

[Myth465]

Good points raised about retirees, never really thought about how you service the tax with no / fixed income.

Tough deal. I dont ever see Texas changing it though, money has to come from somewhere, and people prefer a hidden tax to an income tax.

[Guest Qu1nt3ss0n]

I feel that shorting mining companies and mining service companies on ASX is a better strategy.  There has been a big recovery in values of those firms from their collapse earlier this year.  Would love to see any work that anyone has done on that, or better yet identify a high quality newsletter that focuses on ASX shorts.  I would be looking for mining services firms in gold and copper and coal sectors that took on lots of debt that cannot be serviced in a long term secular decline of the mining sector.

 

Grant's letters have been short on Australian mining for a while... I recall a recent letter on mining-related/service companies, Fleetwood (FWD) and Mondalephous (MND)

 

VII Mar'13 letter features David Hurwitz, who gives his thesis on shorting Commonwealth Bank (CBA)

 

Also checkout http://shares.intelligentinvestor.com.au/ .. Its an Australian value investing newsletter.

[ERICOPOLY]

Looks like they want to stimulate the economy by lowering the Australian dollar instead of cutting rates:

 

http://finance.yahoo.com/news/aud-usd-dives-below-0-135000747.html

 

The Australian Dollar took an unexpected spill this morning after Reserve Bank of Australia Governor Glenn Stevens surprised markets with overly dovish commentary. Noting that the economy won't likely be influenced by further rate cuts, Governor Stevens suggested that the economy would fare better if the AUDUSD traded closer to $0.8500.

 

I would tend to believe that foreign property investors would hate this kind of thinking.

[wisdom]

Australia's cost of labour is so high that it has priced itself out of all markets other than commodities. If commodity prices (iron-ore/coal) drop, it will not be pretty.

 

GM recently announced that it is walking away from Australia.

 

Luckily for them the government has a strong balancesheet and can stimulate further.

[ERICOPOLY]

Regarding their cost of labor...

 

I remember in the late 1990s (around 1999) my Australian engineer cousins were envious about our pay rates here in the US.

 

Did that change?

[ERICOPOLY]

That decision by GM is interesting. 

 

Imported cars are very expensive in Australia due to the import duties. 

 

What if there are no longer any domestically produced cars? 

 

[wisdom]

Manufacturing is leaving Australia because of the high cost of blue collared wages/minimum wage.

 

They had a 20 year boom with no recessions. Unemployment levels have been extremely low and the mining companies increased demand for labour over the last 10 years especially.

 

If commodity prices drop for any reason what does Australia fall back on? The economy today is reliant on mining, finance (again related to the mining companies and Sydney has been the big beneficary), tourism, manufacturing (Melbourne) and real estate related construction.

 

1) Tourism has been slowing because of the high AUD.

2) Mining has recently started slowing and several projects have been called off due to Chinese demand not being there.

3) House prices are high and personal debt levels are fairly high as well - real estate can't go much further.

4) If mining companies slow down and the demand for capital isn't as high - Sydney would slow down.

5) There aren't many jobs for engineers other than the car companies and mining related stuff in Australia. If the car companies leave and mining slows down their wages will not be rising anytime soon.

 

I wasn't referring to white collared wages as much. If my cost of labour to manufacture is high, I don't see how engineers would have anything to design or build unless you manufacture locally.

[wisdom]

I would add - immigration levels have been high.

 

Historically, Australia reduces number of immigrants coming in when there is a slow down. Not that any other society is any different.

 

I would also argue that the individuals have probably taken on too much debt when you consider that they have nothing else to fall back on if mining and real estate slow down or turn down.

 

Negative gearing to reduce taxes is used widely in Australia - you buy a property for its negative cashflow to write off the losses against your income and hope to make up the difference in capital appreciation.

[one-foot-hurdles]

2 Charts (see attachment) - household borrowing and Aus house prices relative to global

[one-foot-hurdles]

..