Wednesday, December 30, 2015

Why we'll have to pay polluters to stop polluting, as soon as possible

Get set for a scorcher.

None of what you've been noticing is wrong, it really is much hotter than in your childhood.

And it's getting hotter. The US National Aeronautics and Space Administration says this year will almost certainly be the hottest on record, following on from last year which was the hottest year recorded.

So far, nine out of the world's hottest 10 years on record have begun with the number 2. That means they took place after the year 2000 rather than in the 1900s, when most of us grew up.

The good news is that the Paris talks showed our leaders are on to it. Ministers including Julie Bishop committed first to holding the increase in the global average temperature to "well below" two degrees (where most of the Arctic melts) and then to "pursuing efforts" to limit it to 1.5 degrees.

It's already one degree hotter than it was before industrialisation. The emissions pledges taken to Paris would have kept the increase to only about 2.7 degrees. That's why the ministers pledged to come back every five years with new and tougher targets and to explain how they are going to meet them.

The implications are jaw-dropping. The agreement says that to just hold the line at two degrees, emissions will have to peak as soon as possible and then slide so rapidly that by the second half of the century there will be "a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases". That means zero net emissions. That's what Bishop has signed us up to: zero net emissions, by the second half of the century.

It is trite to say that the Turnbull government's $2.5 billion Direct Action program won't achieve it. A legally required update released quietly by Environment Minister Greg Hunt late on Christmas Eve shows emissions actually climbing. But it is probably also true that the Gillard government's $9 billion a year carbon tax wouldn't have achieved it either, not unless the carbon price soared to extremely high levels...

What's needed is to quickly shift most of our cars, trucks, factories and heating away from fossil fuels towards electricity and to make electricity close to emissions-free.

The Australian National University's Frank Jotzo has done the numbers in a report prepared with ClimateWorks, a privately funded think tank. It says that to meet just the two degree target we will have to close all of our brown coal power stations by the early 2020s, and all of our black ones by the early 2030s.

It isn't the sort of task Gillard's carbon tax was set up to achieve, which is why Gillard herself also set up a "Contracts for Closure" scheme under which existing highly polluting plants would be paid to close, after putting in bids. She walked away from it after she realised all of the bids would be too high.

Hazelwood, in Victoria's Latrobe Valley, is the obvious candidate. Perhaps the dirtiest power station in the world, it spews out 60 per cent more pollution a unit of electricity than the NSW black coal stations north of the border. It spews out three times as much as gas-fired power stations.

But why would its owners close it? The coal is relatively cheap because it is next to useless for anything else. Much of it isn't even dried, adding further to emissions. As things stand the NSW black coal stations are far more likely to close than Victoria's more polluting brown coal stations.

And it would cost big money to rehabilitate the site. The inquiry into the 2014 fire at the Hazelwood mine put the cost of decontamination alone at $100 million. Besides, if Hazlewood closed first, the stations that remained would grab its market share. There's a pay-off for not being first.

Paying the stations to close (as Gillard proposed) would result in politically unacceptable and unreasonably high payments to the biggest polluters (as Gillard discovered). Knowing there will be another auction down the track, and then another, they will hold out for very high prices.

So Jotzo has come up with an ingenious solution. It's a Gillard-style auction, where polluting generators put in bids for how much they are prepared to accept to close. But there's a twist. The payment comes not from the government, but from the remaining generators, in proportion to their market share and the amount they pollute. If a big polluter such as Hazelwood loses the auction by asking for too much, it'll be on the hook for big payments to whoever wins.

There would be an incentive to bid low rather than high, and none of the remaining generators would be made too much worse or better off. They would grab market share, but they would pay for it in accordance with the amount they polluted.

The winning bidders would have to use their winnings to rehabilitate their sites and pay government-specified assistance to their displaced workers.

It's by no means a complete solution. Future auctions might operate differently. The point is we are going to have to do everything we can to turn Australia electric and to squeeze most of the remaining emissions out of electricity. The old debate about a carbon price versus direct action is losing its sting. What matters now is finding something that works, and finding it quickly.

In The Age and Sydney Morning Herald


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Tuesday, November 24, 2015

They're not going to push up the GST. Super is where the action is

It's getting near the time when Scott Morrison and Malcolm Turnbull will need to make decisions about tax, and I'm not talking about the GST.

The big GST decision, on whether to lift it to 15 per cent, is already as good as made. The Treasurer and Prime Minister won't do it. Nor will they extend the goods and services tax to food, to health or to education, although they might yet extend it to financial services.

Extending it to health and education would be unfair. People such as me who use public schools and public hospitals without charge would pay no extra tax, while others already paying dearly would be asked to pay an extra 10 per cent. And, in all likelihood, the government would feel obliged to further fund private schools and the private health system to compensate. Extending the GST to fresh food was never going to happen. It would hit low earners the hardest, and these days it's almost impossible to compensate them.

When the GST was introduced in 2000, most low earners paid tax. But not now. In the past 15 years, the tax-free threshold has tripled to $18,000. And most self-funded retirees no longer pay tax. It's no longer possible to compensate them by cutting tax rates. And because many of them don't receive cash payments (that's why they are called "self-funded"), it's not possible to compensate them by boosting payments either.

Lifting the GST to 15 per cent or fully taxing food would be incredibly difficult if they wanted to compensate the least-well off, and Australians insist on it. New Zealand lifted its GST from 10 per cent to 12.5 per cent in 1989 without compensation, but it couldn't happen here.

And they'd be doing it for the states. Under existing laws, the GST flows to them. But the states aren't even agreed they want more GST. With NSW in favour, and Victoria against, and the money not flowing to the Commonwealth in any event, there's little reason for it to go out on a limb putting the case for collecting more...

Except for financial services. They weren't properly taxed when the GST was introduced, because they were hard to define. The financial service is the margin the bank adds to a product such as a mortgage, rather than the mortgage itself. If Australia managed to do it, it would raise an extra $4.7 billion a year without the need to compensate low earners (financial services are disproportionately used by high earners).

And it could use the promise of extra money for the states to persuade them to phase out some of their truly objectionable taxes, such as those that single out insurance and commercial property transactions.

Morrison and Turnbull's big decisions concern superannuation. Right now, most wage earners pay just 15 per cent on their contributions, even if they are on the top marginal tax rate and earning $200,000-plus. (At Labor's last gasp, it introduced an extra tax for the small number of Australians on $300,000-plus, taking their rate to a still-concessional 30 per cent.)

The best way to tax contributions would be to tax everyone at their marginal rate. Very low earners would pay nothing, very high earners would pay 45 per cent, and so on. It would rake in an extra $15 billion a year, an amount that would climb over time.

If they were feeling generous, they could give some of it back, perhaps a flat 10 or 15 percentage points up to a limit, through a rebate paid into funds.

But they would have to go further. Earnings, as well as contributions are lightly taxed, a benefit that accrues overwhelmingly to high earners with large balances. The standard rate is just 15 per cent, although funds are able to roughly halve it by the way they structure their investments. When the fund is used to pay out retirement benefits, the tax rate on earnings drops to zero. Not only are the payouts not taxed, no matter how big, but the earnings used to generate those payouts are completely untaxed, no matter how much is under management.

Unless Morrison fixes it, the hole will get bigger and bigger as more and more Australians retire and enjoy completely untaxed investment earnings.

Fixing it will make him enemies. Neither the big institutions that control the private funds nor the unions and employers that control the industry funds will want to pay more tax, and retirees will claim that taxing their investment earnings is retrospective.

But there's a way out. It's the one the government has already used to push up the pension age. Rather than declaring that the investment earnings of retirees will be taxed now, Morrison could declare that the investment earnings of future retirees will be taxed in, say, 15 years. Nothing would be retrospective. Anyone who had already retired could keep their zero tax rate until they died. Future retirees would have plenty of time to prepare.

Squibbing this decision will condemn Australia to an ever-widening hole in its tax system and show that Morrison and Turnbull aren't serious about fixing it.

I think they are.

In The Age and Sydney Morning Herald



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Tuesday, November 17, 2015

Immigration: The economic case for open borders

This is about the worst time to write that we should open our borders.

One of the suicide bombers who took part in the Paris attacks was a refugee, or at least had the passport of someone who was let in as a Syrian refugee.

The assistant speaker of the NSW Parliament has called on the Prime Minister to close our borders to Islamic refugees, at least until we have a better idea of who we are letting in. Yet, the case for opening our borders, as part of a staged process, in concert with other countries, is extraordinarily strong.

Worldwide, the best guess is that if all borders were opened and people could move where they liked, global income would double. By way of comparison the gains from removing barriers to trade such as tariffs amount to only a few per cent of global GDP.

Harvard economist Lant​ Pritchett says even if the barriers to immigration were loosened just a bit (enough to boost the US labour force by 1 per cent) global income would grow by more than all the world's official foreign aid combined. US economist Alex Tabarrok​, writing in the October issue of the The Atlantic, describes immigration as the greatest anti-poverty program ever devised. 

But what would freer immigration do for us, at the receiving end? We can take it as read that it would improve the lives of those who moved here. That's why they'd do it.

In a draft report released on Friday, the Productivity Commission presented the preliminary results of modelling it is conducting on the effects of immigration on income per head. It said that without any further immigration, Australia's real income per head would climb 42 per cent by 2060. With immigration, continued at its present rate, income per head would climb 50 per cent.

Immigration makes us richer. Without further immigration the proportion of the population aged 65 and older would swell from 14 to 28 per cent and the number of workers would shrink. Continued at present levels, immigration would hold the proportion at 22 per cent.

Australian National University professor Bob Gregory believes the government's first intergenerational report got immigration wrong. It said that immigration was of little use in stopping the population from aging, because immigrants themselves aged. Gregory says while this is true in the very long-term, from decade to decade the effect is enormous...

Immigrants are typically young, but not too young, between the ages of 18 and 40 – exactly the age range in which they are the least likely to use government services and most likely to pay for them.

So big has been the economic boost from increased immigration over the past decade that Gregory compares it to the mining boom. He says it eclipses the potential boost from lifting productivity, except while the mining boom came and went, the boost from increased immigration will last.

It is already beyond our control. Immigration soared way beyond what planners expected in the first half of the last decade, and then dived at the start of this one, making a mockery of the former prime minister John Howard's famous declaration that we would decide who came here and the circumstances in which they came.

New Zealanders can move here without limit under an agreement signed decades ago. In better times, 45,500 a year moved here. Now, with the New Zealand economy looking better and ours worse, it's only half that.

An astounding 345,600 foreign students live here with the ability to work (down from 434,000 when times were better), 188,000 workers live here on temporary 457 visas (down from 202,000), and 143,900 work here while on holidays.

All of these programs are uncapped, all give the people who use them the inside running on permanent migration, and all eat away at the fiction that we control our borders. Loosening control further is likely to help, rather than harm us, so long as it boosts immigration.

It's true that immigrants put a greater strain on our cities and on our environment, but we have scarcely begun to manage those things properly. Charging for road use and carbon emissions would be a start. And by contributing to Australia, immigrants give us the resources to build more infrastructure and protect our environment, if we have the will to do so.

Immigration boosts incomes because it allows people to move to where they can reach their full potential. Imagine a world in which the citizens of Ballarat were walled in and prevented from taking advantage of the opportunities in Melbourne. Imagine that the citizens of Melbourne gave them aid and bombed their enemies, telling them they would do anything to help them, other than letting them in.

Even worse, imagine that we locked up the citizens of Ballarat who tried to reach Melbourne, preventing them working, deliberately wasting the greatest resource on earth.

When the father of modern economics, Adam Smith, wrote The Wealth of Nations, he was referring not to wealth in the form of gold or silver, but to the wealth embodied in people able to exercise their full potential.

Yes, we would need to free up immigration slowly in concert with other countries, perhaps as part of trade agreements, and yes, we would need to be on the lookout for terrorists and criminals, just as we need to be on the lookout at home.

But the benefits of freeing up immigration dwarf those of anything else imaginable. In time, I think we'll see these benefits.

In The Age and Sydney Morning Herald



Recommended reading

. The real benefits of migration - Tim Harford, Financial Times, October 27, 2015

. The Case for Getting Rid of Borders—Completely - Alex Tabarrok, The Atlantic, October 10, 2015

. If People Could Immigrate Anywhere, Would Poverty Be Eliminated? - Shaun Raviv, The Atlantic April 26, 2015

. Economics and Emigration: Trillion-Dollar Bills on the Sidewalk? - Michael A Clemens, Journal of Economic Perspectives, Summer 2011

. Let Their People Come: Lant Pritchett, Center For Global Development, Washington 2006

. What makes a terrorist? - Alan B. Krueger, Vox, 11 September, 2007

. Open Borders: The Case website


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Tuesday, October 27, 2015

Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald


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Thursday, October 22, 2015

Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald


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Wednesday, October 21, 2015

Now Hockey says he wanted to tax the rich all along

Now he tells us.

Hockey wanted to wind back super tax concessions all along.

"We should be wiser and more consistent on tax concessions," the former treasurer told Parliament in his farewell speech. "In particular, tax concessions on superannuation should be carefully pared back."

It wasn't what he said while he had the job.

When Labor put forward rather mild measures that would have reduced super tax concessions Hockey said only Labor wanted "to introduce new taxes and have new changes on superannuation".

"The last thing you would want to do to people relying on investment income is to hit them with a new tax," he said.

All Labor wanted was to ensure that retirees getting more than $75,000 a year in super actually paid tax, at a rate of 15 per cent. And it wanted to more highly tax super contributions, but only for Australians earning more than $250,000.

Until Labor came forward with these most inoffensive of suggestions, Hockey had indeed spoken quietly about doing something about super tax concessions. But as soon as Labor offered support, he and the rest of the Coalition backtracked as fast as they could.

He now says he wanted to re-skew negative gearing toward new housing so there was an "incentive to add to the housing stock rather than an incentive to speculate on existing property".

Again, it's not what he said at the time. In July he attacked Labor's never-announced proposal to do something just like that, saying it would create "an exception to a standing rule in taxation law, and that is that you can deduct the cost of, or the losses, against, another form of income".

In his valedictory speech he said he had endeavoured "and failed" to keep all tax options on the table. It was an admission that he had wanted to do the right thing but lacked the strength to follow through.

Who knows? Eventually he might have found it. But how long would we have had to wait?

In The Age and Sydney Morning Herald


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Tuesday, October 20, 2015

Asking what super is for opens a can of worms

The Treasurer jumped the gun.

Promising in his formal response to the financial system inquiry to determine and enshrine in legislation the objectives of Australia's $2 trillion superannuation system Scott Morrison cut to the chase. It's primary purpose was to "ensure that when Australians reach retirement age they will not be reliant on welfare".

Which is fair enough. But other people think super is for other things, which is why the Murray Review demanded that someone clarify its purpose.

Some think it's for income smoothing, in which case it make sense to allow withdrawals for home deposits. Some think it's for wealth accumulation, in which case it makes sense to keep giving high earners the biggest super tax breaks. Some think it's to build national saving, in which case tax breaks for high earners also make sense.

If the government adopts Morrison's definition of the purpose, tax breaks skewed to high earners make no sense at all. They ought to be skewed in the other direction, towards those actually at risk of falling back on the pension.

Right now, as the Murray review told him, the top 10 per cent of earners get more than 35 per cent of the concessions. The bottom 10 per cent get none, the next 10 per cent get just 1 per cent.

It would be easy to switch things around. Labor's Henry tax review suggested taxing all super contributions at the taxpayer's marginal rate offset by capped rebates...

But maybe that's not what Morrison means. He and Assistant Treasurer Kelly O'Dwyer are keener to talk about putting people in the "driver's seat" when it comes to managing their money. That means allowing all Australians the right to choose their own fund, whatever their enterprise agreement says. David Murray saw it as human right. Morrison and O'Dwyer might also see it as containing the influence of unions.

Murray suggested going further and introducing a competitive tender to pick new default funds, taking the power away from employers. The Coalition is less gung-ho on that, punting the idea off the Productivity Commission to develop models ahead of an inquiry later this decade.

There are good reasons why no-one has adopted a formal definition of the purpose of super until now. Clarifying the purpose would involve clarifying the role of tax concessions and compulsion. It would involve asking hard questions.

In The Age and Sydney Morning Herald


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The bubble is shrinking. But why were house prices ever so high in the first place?

The madness is receding.

Each month for a year now more than half of all the dollars lent for buying and building homes went to investors. The insanity is apparent when you consider that until the mid-1990s only 10 to 20 per cent went to investors. People bought houses to live in.

In May this year as prices in Sydney and Melbourne soared to once-unimaginable heights the proportion lent to investors hit an all-time high of 53.5 per cent. And then it slipped, in August sliding below 50 per cent for the first time in a year.

At 48.5 per cent, it's still ridiculously high, but something has changed. The canaries can smell the gas.

The Reserve Bank has been desperate to contain investors because it believes they are accelerating the boom and might amplify the risk of crash.

As it put it in its Financial Stability Review released on Friday: "Investors are more likely to contribute to the run-up in prices than owner-occupiers because the rationales for their purchases differ: capital gains are likely a greater motivating factor for investors, and rising prices can induce even more investor demand by increasing expectations for future price rises. Investors also tend to face fewer barriers to exit."

Investors were also denying owner-occupiers houses they once would have bought. Before the cut in capital gains tax that sparked the boom in borrowing for investment, fewer than half the households headed by Australians aged 25 to 34 rented. Now it's 60 per cent.

The Bank and the Prudential Regulation Authority have been heavying the retail banks to make things more difficult for investors. Last week they hailed "tentative" signs of success. And then Westpac put up all variable mortgage rates 0.20 per cent.

At Saturday's auctions in Sydney only 65.1 per cent of properties sold. A week before it had been 70 per cent. Back in May it was 90 per cent. Melbourne's clearance rates held up at 73 per cent.

Macquarie Group is predicting a 7.5 per cent decline in house prices over the next two years. If it's gentle, it'll be good. But why did they ever get so punishingly high in the first place?

Tax is an awfully big part of it. When the Howard government halved the headline rate of capital gains tax at the end of the 1990s the price of a typical house jumped from two to three times household disposable income to four times disposable income. At no other time in Australian history have prices jumped so far so quickly. Negative gearing (making losses on rent to offset against other income in order to enjoy a barely-taxed capital gain) became mainstream...

"It is a truism that if an investor is buying a property, an owner-occupier is not," the head of the Bank's financial stability department Lucci Ellis told the parliament's home ownership inquiry in July. "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."


Investors like to believe that they are creating new properties, adding to supply and driving down prices. But few of them are. Before the explosion in negative gearing, one in every six new investors built a home. It's now one in 16.

Tilt has also ramped up house prices by making them more affordable to start with, at the cost of being less affordable over time. That's the "tilt". It used to be the other way around. When interest rates and inflation were high, the upfront cost of buying was high (because the of the mortgage rate) but the payments became easier over time as wage rises inflated the burden away. These days low interest rates make it much easier to buy a house (so long as you can get a deposit) but low inflation makes it much harder to pay off.

The changed tilt has pushed up prices because borrowers who didn't realise what happened rushed in and bid in order to take advantage of cheap rates without realising that the burden would stay with them for much longer.

Increasing wealth has been the other big driver of house prices. The richer we get after meeting our basic needs the more we are prepared to pay for the place in which we live. (The fact that owner-occupied housing is entirely tax free helps as well.)

The typical home now has 3.1 bedrooms, up from 2.9 two decades ago, as well as other rooms such as studies and extra living rooms that used to be uncommon. Eight out of 10 homes now have at least one bedroom free.

But that's not where the real money is going. For those who that can afford it, place is more important than space. And there's a limited number of well-located places. The bigger our cities become the more important it becomes to have a place close well in to the centre, or vaguely near the sea.

It's the prices in these suburbs that move first, and short of a wealth tax or a land tax or a capital gains tax on the family home, there's nothing that that can be done to stop them rising.

"More supply", the simple fix, isn't going to help.

It's wise to resign ourselves to the reality that some house prices are always going to be beyond most of us. But if the other prices of other houses ease off and fall for a bit, we will be able to count ourselves lucky.

In The Age and Sydney Morning Herald



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Sunday, October 18, 2015

Deadline stressed? You've brought it on yourself

You probably shouldn't be reading this.

You've got too much to do. But that's one of the odd things we do when we've too much to do: we thumb through newspapers, we check our email, we read articles like this about how to get through our list rather than actually getting through our list.

We act as if we've taken leave of our senses.

Just about everyone knows the way to get through a list. It's to take on fewer projects, start big projects earlier and finish them sooner. But almost no one does it. It's as if, when we are busy, we lose the mental strength to escape from our busyness.

That might sound familiar. It should. It's the way dieters approach dieting. Everyone knows that the way to do it is to eat less and to eat less often. Yet most can't manage it. We start to diet, then we get hungry, and lose the mental strength needed to keep going.

This isn't just an analogy. Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir​ reckon it's the same thing. They set out their argument in their new book titled Scarcity: The New Science of Having Less and How It Defines Our Lives.

They believe that scarcity (whether of time or food or money) makes us temporarily dumber.

They're even prepared to say how much dumber. They say it's worth 13 to 14 IQ points.

Thirteen points is enough to move you from "average" to "superior" intelligence, they say. "If you move in the other direction, losing 13 points can take you from average to a category labelled borderline deficient."

Not for one second are they saying that busy people are dumb or that dieters are dumb or that poor people are dumb...

They are saying that when we get into those situations we become dumber and that that makes those situations worse. As they put it: "scarcity creates its own trap".

Here's how it worked with a group of shoppers they surveyed at a New Jersey mall. Just before administering the IQ test they asked about auto insurance:

Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision?

Rich and poor shoppers answered the question in much the same way, and were roughly matched in the intelligence test that followed. Then they administered the test to a new group of shoppers, but changed one detail of the question. Instead of it being a $300 service, it became "an expensive $3000 service".

A rich shopper is easily able to handle $3000, but for a poor shopper it is almost impossible. The rich subjects did just as well as before in the intelligence test. The poor subjects did far, far worse.

They'd been made worse because they had been made to think about financial problems, which soaked up their "mental bandwidth".

As Mullainathan and Shafir put it: "The mind orients automatically, powerfully, toward unfulfilled needs. For the hungry, that need is food. For the busy it might be a project that needs to be finished. For the cash-strapped it might be this month's rent payment; for the lonely, a lack of companionship. Scarcity is more than just the displeasure of having very little. It changes how we think."

Someone desperate for enough money to make it through the week will be attracted by a payday loan, whatever the interest rate and the likelihood of paying it back. Their critical facilities will be weakened and they'll become poorer still.

A dieter unable to think about anything but food will relent (just once) telling themselves they will make it up the next day, without realising they'll probably relent the next day as well.

Someone mired in deadlines and an overwhelming workload will say yes to just one more project (so long as it is in the future) without realising that they've just made things worse.

The solution they propose is to consciously build slack into our systems: to only accept work that won't overload us, to go on a less demanding diet, or to further lower the living standard we accept. They are solutions that might make sense if so much of our brains weren't tied up worrying about the next crisis.

And that's the problem.

In The Age and Sydney Morning Herald


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Friday, October 16, 2015

No longer a nation of homeowners, we're renting

Once a nation of homeowners, we are becoming a nation of renters.

It's been two years since the latest update on housing occupancy and the one released on Friday show the proportion of households renting has edged up to 31.4 per cent. The proportion owning outright is only a point or two in front, at 32.5 per cent. Around 35 per cent of homes are mortgaged.

Back before the tax change that ignited negative gearing at the end of the 1990s around 40 per cent of households owned outright, and only 28 per cent rented.

It's the flipside of the boom in second properties that has made Australia a nation of landlords. The Bureau of Statistics says an extraordinary 1.5 million households now own properties they don't live in. Among high earners 39 per cent own a second, third or fourth property.

The extra properties need tenants, and the higher prices the landlords have been prepared to pay to get the properties have created a new class of tenants - those who once would have been able to afford to buy in their own right.

In September 1999 the Howard government halved the headline rate of capital gains tax, making the life of a negatively geared landlord suddenly up to twice as attractive as it had been.

So popular has the lifestyle become that the Bureau of Statistics reports that about 300,000 landlords don't live in their own homes. They rent out, while renting elsewhere themselves.

Among households headed by Australians aged under 35 an extraordinary 63.4 per cent rent.

Labor has held out the prospect of some sort of action to wind back negative gearing in order to make owner-occupation more affordable.

Tony Abbott ruled it out, but there's a glimmer of hope. Malcolm Turnbull is prepared to think again.

In The Age and Sydney Morning Herald

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