Early Christmas Present for Mortgage Holders

Mortgage holders on flexible interest rates and anyone thinking of buying real estate have been given an early Christmas present in the form of 2 interest rate cuts by the Reserve Bank of Australia.

It has been a very tough year for property. Floods, tsunamis, earthquakes, 3 new taxes (flood, mining and carbon tax), sovereign debt crises and even a serious US debt limit crisis not yet resolved have hit confidence worldwide. In Australia, consumers have turned to savers and retailers, house builders, inbound tourism and especially manufacturing are all affected.

2012 should see an improved real estate market in NSW. There is pent up demand from population growth and supply of new housing is at record lows. In Spain and Ireland there are millions of empty new houses. We can sell any house if the price is right!

Merry Christmas and a Happy New Year!

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Onerous NSW Stamp Duty

When I purchased my first block of land for $12,000 back in the seventies, stamp duty was not a major consideration in absolute dollars. As time went on however, the house my wife and I first built wasn’t quite right, especially with an expanding and growing family. At each stage that we considered a new extension we tossed up whether we should just relocate, but each time stamp duty weighed heavily against us moving.

Job mobility was always another problem. If you lose your job in Sydney, chances are you can get another one and not have to move. However, if you should move because your new job is 2 hours driving away (one of those unfortunate squinters that travel towards the sun in the morning and again in the evening), how much of a deterrent is stamp duty? I believe it is huge. Tuesday’s SMH reminded me of this and other considerations which make NSW stamp duty so onerous and why it stops people moving out west or interstate where the jobs are.

Apparently the new Federal Treasurer agrees. Even the Henry Tax Review stated that “really there is no place for stamp duty in a modern tax system”.
How much easier would it be to sell houses if buyers did not have to pay stamp duty? How much easier would it be to fill the new Greenhills Beach estate in our Shire if stamp duty was not a factor in the equation when weighing whether to stay put and suffer a house which is a compromise, or buy a block of land and put your dream house on it?

Let’s hope the State government sees the sense too, rather than allow 19 storey high rise apartments to be built next to 100 year old beautiful terraces in Erskineville, within a kilometre of where a company has a permit to drill for CSG (coal seam gas).

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The Power is Out Indefinitely

Imagine that in Australia. It would be more than horrible. We would survive on BBQ dinners and Wheat Bix for breakfast.  In Japan still in winter and with dangerous radioactive air; what are they going to do? Their emergency just goes from bad to worse. Communications are down, power is out and food is scarce. The Australian rescue teams have to walk 10kms even before they can start work on their rescue mission. The US aircraft carrier has had to move north because it was registering radioactivity on its instruments.

The world awaits, with bated breath, a possible nuclear meltdown at Fukushima. The threat of such a meltdown is reverberating around the world. The one country keeping quiet is France which depends up to 80% on nuclear power. They kept quiet during the Chernobyl disaster as well.  Yet, just across the border in Germany supermarkets threw away all fresh food and immediately changed the sand in the sandpits at every preschool. With this latest emergency Germany has decided  to review its decision to extend the life of their old nuclear reactors. Russia  has already said it will continue with its programme. In fact, they are building smaller nuclear reactors that will be able to float or be mobile to be used in remote areas with tundras that are thawing.

The world will find a way around this latest threat. Nuclear scientists around the world will be focusing on the emergency in Japan. In the meantime, any plan to introduce nuclear power into Australia will be put on hold. The PM last night said on Q&A that Australia has plenty of solar, wind, and geo-thermal potential. Maybe the plan is to apply a carbon tax and put the proceeds into subsidizing clean energy. We can but hope.

Uranium stocks are being hammered but they will come back. Our coal and LNG will be in demand once the immediate emergency is over. Japan has 55 nuclear power stations and in any event only relies on nuclear power for 30-35% of its power needs.

Some oil refineries are on fire but other oil refineries inside or outside Japan will take up the slack, at a price, which will rise.

Since last week when I discussed the consequences of a US$200 a barrel oil price. Japan has gone into crisis mode and the situation in Libya has deteriorated. It has 5 old refineries which can not even produce unleaded petrol.  Output is mainly for internal consumption.  Its biggest refinery at Ras Lanuf (220,000 barrels pa) has just been retaken by Gaddafi’s forces. It will be out of action for some time but its loss will have little impact.

In Saudi Arabia there was to be a day of rage but public servants have been given a 15% pay rise, putting off their grievances. This pay rise will cost the Saudis the equivalent of US$10 a barrel, putting upward pressure on the world price which, in effect, is controlled by the Saudis, who are the world’s second biggest producer (after Russia) but has the world’s largest reserves at 250 billion barrels (good for 125 plus years compared with Russian reserves which will only last about 20 years). Saudi oil production and oil refining is mainly situated in the remote parts of the country. Their biggest oil refinery at Ras Tanura (550,000 barrels pa) is heavily fortified and built on a narrow promontory.   Its owner, Saudi Aramco, is the world’s richest company 100% owned by the Saudi government. As an oil producer they have plenty of scope to increase production. Their cost of production is minimal compared with Gulf of Mexico deepwater drilling.

The oil cartel comprising the big oil producing countries (OPEC) would no doubt love to see an oil price of US$200 a barrel but realizes full well that that price will just make it easier for substitutes such as LNG or encourage expensive deepwater drilling. Therefore if the oil price goes up too quickly OPEC will produce more to offset the price rise.

In conclusion, whilst  Libya and Japan are national emergencies they should only have short term effects on the oil price, the floorprice of which will move steadily upwards because of inflation but spike with any emergency such as a meltdown in Japan, Heaven forbid.

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Oil at US$200 a barrel?

What then you might ask?

With the spread of rebellion against dictators in Africa and the Middle East, anyone with an interest in the future should start to think very seriously about what the future has in store.

Libya will not be pumping much oil for a while and even though they only rank 18th in the world in terms of barrels produced per day (1.8mil barrels in 2009), in today’s prices, that means Gaddafi was getting US $180mil a day to put towards his weapons stash. He might hang on for a while.

Every day he keeps fighting the world gets more nervous and the price of oil goes up. If the fighting spreads to Saudi Arabia then we are in serious trouble and USD200 a barrel is a real possibility.

First of all, world stock markets will retreat as the oil price goes up, except for gold stocks and the gold price, already at an all time record. As stock prices fall investors and superannuation fund managers will be looking for alternative investments such as property.

Of course property will also be affected because the cost of all construction will skyrocket as the price of oil rises.  New loan approvals for housing are already at record lows. They will fall further because construction quotes will rise sharply.

Electricity prices will go up because alternatives to oil, such as gas and coal will go up in sympathy with oil. If a carbon tax of say US$20 a tonne is introduced, on coal,  while its price is at say US$300 a tonne, coal producers won’t have much reason to complain.

Higher electricity prices will feed into the CPI and inflation will break out of the RBA’s comfort zone of 3%pa. and interest rates will come under pressure to rise again.

None of this was on the horizon before Tunisia and then Egypt decided they had had enough of dictators. Since then even Saudi Arabia and even China have become concerned about unrest.  Let us hope that the world settles down again quickly, admittedly with less dictators,  so that none of this comes to pass.

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Taxing Homes Vs Carbon Tax

A group of top businessmen were reported in the SMH last week as recommending that homes be taxed instead of taxing carbon. Letters to the editor quickly showed how horrified people were about that idea even though the promotors were probably not planning to tax past gains.

Even so, if the government were to tax  purchases of family homes from now on there would be an outcry because such a scheme would be placing a huge tax burden on future generations who are not necesarily the ones polluting the most. If interest on new family homes became tax deductible then a case could be made for taxing them. The trouble would then be that new buyers are not likely to be sellers for a generation (while they get a tax deduction for interest) so tax proceeds will rise only slowly, whereas under a carbon tax  government coffers will fill immediately.

No, the carbon tax should hit polluters, e.g. 4WD’s, cows (which produce methane which is 25 times worse than CO2), coal fired power stations.

Taxing petrol is a blunt instrument which will hurt those commuters most that have to drive long distances because there is no public transport alternative. On the other hand how will the Federal government tax V8’s and 4WD’s out of existence without hurting ordinary people who have to use a car to get to work. Registration would be one way but that is a state government area. Any suggestions?

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Changing moods as Australian Banks break-up and Obama wrestles debt.

The mood seems to have changed as we enter the second month of 2011. As the summer holidays end and its back to work, people and countries are starting to worry about their debt. From a domestic viewpoint, it looks like Australians are going to benefit from the war that has just been declared today, by the NAB against the other banks in a full page newspaper spread, cleverly marketed as a post-Valentines day break up.

The hope is that this will make the banks more competitive for mortgage rates and bank fees. A great relief for many mortgage holders, as Australians pay some of the highest rates and fees in the world.

How effective will the National Australia Banks strategy be?

I don’t think that the CBA, for one, will worry too much. Firstly, CBA would not be scared about losing a few disgruntled home borrowers, they have too many (as a % of total lending) anyway. Secondly, the CBA is so far out in front of technology that few will want to forgo that technology unless they are desperate for any slight reduction in rates. Those people are going to walk again as soon as someone else offers them a slightly lower rate.

Internationally, in regards to country debt, Australia is fine for now, thanks to the resources boom. Once the boom is over, say in 10 years time when China and India have completed their development, hopefully Australia has something to show for digging up its mineral wealth and selling it overseas. Another Snowy Mountains scheme?

Other countries e.g. U.S, U.K have huge public debt which threatens to get out of control like it did in Iceland, Greece and Ireland ever so recently. The US, for example has national debt of US$14 trillion, or, as much as the country produces in a normal year. The comparable figure for Australia is about 10-15% against 100% for the US.

Mr. Obama is grappling with this problem right now, in his third annual budget. The best he seems to be able to offer is $1.1 trillion in cuts over a 10 year period. This figure is less than this years suspected deficient. And guess who is going to take the brunt of the cuts? Of course, the already poor (energy assistance for low income families) and poorer states (in grants to develop low income areas). The other cuts are in environmental programs and forest services which are crying out for more funding.

All debt riddled countries are caught between the conflicting need for debt reduction through cuts to spending on the one hand and the pressing need to reduce unemployment on the other. Mr Obama is hoping for innovation and productivity gains to reconcile the two, an impossible task, particularly as Asia copies and improves all new inventions so quickly, a job made easier because everything has to be made in Asia now.

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Lessons from QLD disaster: Don’t let Warragamba get beyond 70% full

Man made climate change is now occurring and inevitably going to get worse because we are selling all the coal we can produce and a carbon tax deterrent is not yet in prospect. Every second car is now a gas guzzling 4WD and very few people are prepared to change their lifestyle.

We can therefore assume that the storms associated with climate change will get worse rather than mitigate. We have not seen the last of the storms currently lashing us. In fact, they are likely to get worse at both extremes of fire and flood.

Hopefully, the commission set up to investigate the QLD floods will ask why the Wivenhoe Dam on the Brisbane River was allowed to get completely full at any point, let alone before the first storms hit.

So far Sydney has been spared this disaster but already television stations are showing what could happen downstream from the Warragamba Dam if similar disasters befall us.

Maybe we should be looking at letting water out of the Warragamba if it gets to 70% full, say so that if a massive storm does hit upstream, the Dam can act as a surge tank to avoid catastrophe downstream on the Hawkesbury/ Nepean plains, Sydney’s food bowl.

All new medium density developments have to install surge tanks to keep the first few minutes water from a bad storm out of public waterways and the infrastructure. All our Dams should be made to work like that, particularly now we have the desalination and water recycling alternatives.

In addition, we need more dams to help with this disaster abatement and not less. I know that dams are not good for the environment but they will help with disaster relief and that is where our focus should be until we can turn back climate change which is becoming increasingly unlikely.

Photo credit: Tatiana Gerus

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Imagine this…

Sometime in 2012 when we go for a trip to Europe we have to start buying German Marks, French Francs and Dutch Guilders like we used to. If that comes to pass then the Aussie dollar will be well above parity with the USD, of that you can be sure. We have already had Iceland,  Greece and Ireland fail. This is tragic enough. What if the dominoes keep falling?

What if the medicine for Ireland does not work.  Public sector wages have already been cut 20% and property prices have fallen 30% but things are still getting worse. Small business can not get loans,  multinationals are threatening to leave if company tax rises above its current 12.5% and they are “silently” withdrawing their money from the banks*. Wouldn’t you if you could not be sure your bank will survive?  Or if your government says one day it cannot cope.Then the next it needs a bailout. Emigration to Australia’s mining sector is looking most appealing.

The next domino looks to be Portugal, one of the poorest nations in Europe. It has gone ahead leaps and bounds since joining the EU and the Euro, with high speed trains and national highways all with borrowed money which was plentiful when times were good.  But basically Portugal is still an agrarian nation making great port, half the world’s cork and great olives, plus it’s a tourist mecca, but what else does it offer? Smart investors will be selling up in Europe and buying property in Australia (or China if the authorities would let them). Even if the property does not go up in value and it more than likely will, the  AUD is almost certain to rise more.

It would be tragic if Portugal also needed a bailout because this beautiful country deserves better. It got to its precarious situation because an over zealous EU threw money at it  knowing it had no real prospect of being able to pay it back.  Public debt is 80% of GDP. Unemployment is 10%.The average wage is only about (equivalent) AUD250 per week. Worse still it has a bloated public service and corruption is a big problem.  Its prospects are not much better than Ireland.

Other  countries on the watch list using the Euro such as Spain and Italy are much bigger and it is unlikely the EU could afford to bail them out. Besides,  the stiff medicine that has to be taken along with the bailout will be unpalatable to the voters.  The whole world was able to see how strongly the French resisted a rise in the pensionable age by two years to 67. There were massive demonstrations and rioters included young people 40 years from retirement.

Of course, there will be winners and losers out of this turmoil. Europe’s woes will push up the AUD

*The Australian 23/11/2010

Our service sector, already suffering, will hurt even more. Our tourism and education industry will contract. Selling manufactured goods overseas will become well nigh impossible.  We desperately need productivity improvement to give our exports an edge.  The price of our resources, such as coal, iron ore, gold,  aluminum, copper,  uranium and many others are all expressed  in USD, so it means that extraction costs of capital and labour rise. Fortunately most of our mines are very efficient and low cost so we should be able to stay competitive.  Dividends are expressed in USD so investors wear the loss if they are in Australia.

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Currency Wars and QE2 continued

In a previous blog post, I discussed the global currency wars being waged across the globe in the aftermath of the global financial crisis. Last week’s G20 summit in Korea saw heated discussion and debate over the state of the global currency market. So what did the G20 summit achieve?

The G20 Nations including Australia’s Julia Gillard met in Seoul last week to expressly look at competitive currency devaluations but very little was achieved except a strengthening of the IMF to help the basket cases. China with its pegged currency and the US with its QE2, faced off but neither side would budge and both leaders blamed  each other for the world’s woes. China maintains that to revalue the yuan would  lead to hordes of unemployed. For its part the US needs its currency to fall to allow it to export more and compete domestically with Chinese  imports.

Unfortunately developments in Ireland are making investors worry about the euro. The immediate investor reaction is to sell euros and buy USD  pushing its value up (which is exactly what the US does not want happening).  At the same time QE2 has led investors to dump US treasury bonds in excess of the monthly amount of QE2 (USD100billion) leading to interest on bonds rising instead of falling (excess sales lead to lower prices but higher interest rates). QE2 could become counterproductive.

Meanwhile China does continue to tighten the restrictions of overseas investment into its already booming property market because its artificially low currency is attracting hot money into property. Chinese leadership fears a property bubble of the  type that first brought Japan undone and now has led to Ireland’s woes. I read today (17 November 2010)  in the Australian that Ireland allowed construction costs to be offset against tax and  the banks were encouraged to offer low interest mortgages with no deposits.  Since the GFC Irish taxpayers have been keeping their banks afloat at a cost of 14000 euros per man, woman and child.  I am so glad we have profitable banks.  If only the Greens would stick to their knitting and worry about the environment rather than stop the banks from raising their rates we would be all much better for it.

It is not inconceivable that Ireland might default  like Iceland did during the GFC (again because of bank failure) and Argentina did in 2001. Argentina seems to have recovered,  but could Ireland or the euro recover from a default?  If not then the USD will rise even faster and QE2 will be a waste of time. We will need a strong Australian banking system to survive that impending storm.

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What is the alternative to more rate rises?

In my last post I predicted the Reserve Bank (RBA) would introduce a rate rise as they did on Melbourne Cup Day. But why was it necessary? And how does our economic situation fair with that of the United States?

Firstly, there is monetary policy and there is fiscal policy. The RBA has solid control over monetary policy but not exclusive sway. The government can print money like the US Fed is going to start doing by the bucket load after the Republicans easily won the mid term election in America today.  Fiscal policy is largely the province of the Federal government, which is in paralysis. They can not get any substantial new taxes through because industry is kicking and screaming at every attempt.  If we had a carbon tax or a mineral profit tax in place the RBA would not have to be taking preemptive interest rate action, as they have this week.

Access Economics  and the Grattan Institute are both calling for sensible tightening of fiscal policy. Professor Simon Davidson of  RMIT has gone so far as to say that fiscal and monetary policy are working in opposite directions because, for example,  $6billion of Building the Education Revolution (BER) money remains unspent as of last week.

In Australia the RBA is trying to reduce inflation under its mandate from the Federal Government. In the US, the Fed is trying to inflate the economy, believe it or not.  Consumers are not spending because they are expecting prices to go down. So the Fed  will be introducing “QE2” in the next few days. QE2 is not a superliner,  it now stands for Quantitative Easing 2 (as in second version). Under QE2 the Fed plans to print money to the extent of over USD100billion per month and pump it into the American economy until they have spent USD1trillion (equivalent to Australia’s total annual GDP) .  They want Americans to start spending again after becoming shellshocked  by the GFC into deleveraging and  saving for their increasingly uncertain future.

This Fed led  money-printing frenzy will devalue the USD even further (some say into obscurity). It will help increase exports and reduce imports, which will go up in price.  All the world will find it harder to export to America and cheaper to travel there. Companies and governments that swap US Treasury bills for newly printed US dollars will want to invest those USD, that are declining steadily in value, in more profitable investments such as gold and overseas property, stocks and business acquisitions. Australia will be the part beneficiary on all these fronts. China will be incensed because their exports to the US will decline, indirectly putting more pressure on the Chinese authorities to unpeg their currency and let it float upwards.

The Fed hopes that QE2 will lead to consumers opening their wallets and spending money in America, but it did not happen under QE1 and  even this time there will be a lot of leakage overseas (to Australia, for example).  Our currency is rising and our assets and commodities are inflating; therefore making for much better investments than are available in America. If QE2 does not work where will that leave President Obama? He wont be able to raise taxes, or reduce his budget deficit or public debt so things are going to go from bad to worse for America. Sorry to be so pessimistic but America is taking its medicine (not spending) but its not improving the patient. America needs surgery. In the meantime China will replace exports with infrastructure projects which make it stronger and stronger. This is a recipe for a Korean War style commodities boom, with attendant interest rate rises. If this transpires then those that did not lock into fixed rates this week,  better do so quickly.

The RBA knows that by raising interest rates it will hurt a lot of marginal property owners who are already suffering enough. However, until the Treasurer, Mr Swan, stops responding to Mr Hockey’s baiting  over banking policy and starts tightening fiscal policy,  the RBA has no choice but to continue raising interest rates. As to further predictions on timing of those rate rises, I will now wait for the next job stats due next week.

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