Tidal Race


Tidal Race. Definition: a stream of exceptionally fast tidal flow created when the tide is forced through a constriction.

Australians are saving like mad and quickly paying down debt. But we stand in a Tidal Race, where the water rises faster than a person can run.

The modest fall in property prices nationally of about 6 per cent in the last year means savers with a median priced house need to reduce debt at $33,000 a year just to stand still. That means banking $125 each working day – more for owners of high value homes.

Don’t stumble!

So many commentators attribute Australia’s current economic funk to events in Europe and America that I am running out of hair to pull. If this was so, Australia could merely adjust the exchange rate, interest rates, print a few extra Aussie dollars and get back to watching that new plasma telly.

Our sulking has a different origin, one we cannot blame on filthy foreigners: the fall in land prices is shrinking the asset base in our personal balance sheets. Meanwhile, the mortgage liability stands unchanged and payable in full, with interest.

Dr Gavin Putland has an interesting and far-sighted post on the central role land values play in prompting recessions here.

Feeling less wealthy, we save – and will do so until our balance sheets balance.

Problem is, we have soooo much debt – private debt, not government debt – this rebalance will take many years and leave economic activity at a standstill.

Stagnation to negative gearers is like garlic to a vampire.

I expect to see bizarre behavior from this group. The rational answer is to cut losses and sell. But the ‘Gearers have self-selected for government assistance in wealth creation and are such obvious financial losers in the deflate they can be expected to vote their self interest at any and every opportunity.

Were the Gillard government to utter a syllable contrary to the interests of the ‘Gearers, they would switch their vote to Mr Abbott in a moment.

So Gillard and Swan have to pretend negative gearing has nothing to do with our predicament. Instead, they jawbone the Reserve Bank, bash the commercial banks, search for first buyer trinkets and mirrors and grimly await the inevitable economic crunch negative gearing was a key feature in creating.

Recent statistics from RP Data suggests the price-fall ‘pulse’ has accelerated to about minus 15 per cent. This insight needs to be regarded with caution as it extrapolates a weekly change to an annual one. It is exactly in line with the price trajectory Prosper forecast at the beginning of the year.

Australia’s feverish pursuit of capital gains – amplified by big debt – drives the economy from boom to bust to stagnation to sell-off. These destructive events have happened too many times in our short history.

It need not be like this. Our wild speculations in the land market are driven by Australia’s rotten tax system that advantages capital gains in real estate over wage earnings or business profits – particularly on our homes.

We haven’t had a recession for 22 years – an Australian record, a world record. Congratulations! But this long build-up guarantees the coming downturn will be particularly nasty and prolonged. Genuine tax reform rebasing government revenues onto the natural endowment would ease the pain of change and set aim for the stars in the eventual recovery.

Tax reform is essential if the words ‘citizen’ and ‘freedom’ are to have any meaning outside a dictionary

1 Comment

  1. Michael O24-05-2012

    $33,000 a year is what most Aussies clear after tax and super contributions.

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https://prosper.org.au/2012/05/24/tidal-race/