According the Bureau of Economic Analysis, US household saving was 0.0 per cent of income in June. I was going to boast that we in Australia were doing better, having had negative savings for several years now, but a check over at General Glut’s Globblog informs me that the ABS figure deducts depreciation of privately owned housing (correctly in my view,though others disagree) while the US does not. Both measures omit capital gains, and the validity or otherwise of doing so is central to any assessment of the sustainability of the present economic trajectory.
Regardless of this, the collapse of household saving in the English-speaking countries suggests to me that, with deregulated capital markets, the low real interest rates that have prevailed recently, particularly in the US, are not consistent with any significantly positive savings rate. It follows that such low interest rates can be sustained only so long as someone else is saving: either households without easy access to credit or foreign governments. Business may save some of the time, but low interest rates make borrowing for speculative investment quite attractive I can’t see this lasting too long, and therefore conclude that real interest rates have to rise.
John Quiggin 
how does out compulsory Superannuation affect Household Savings?
Being no economist, this may well be a dumb question, but do the saving rates include retirement savings?
I ask because anecdotally at least it seems Australians are comfortable spending their housing equity on consumables because they know it is offset by their super.
Compulsory (and voluntary) super is included in the figures. On the other hand capital gains are not. So consumption out of capital gains counts as negative saving.
I probably should know the answer to this question, John, but I’m sorry, I’m not a macro guy.
On my own account, I count the realised gains from my speculation as income, and any unrealised gains as potentially realisable. Potentially realisable gains are adequate security for borrowing, and the proceeds of any such borrowing are available to me to spend as I choose. I can see that if I’m borrowing against bubble inflated housing prices, I might have difficulties repaying if there’s a bubble collapse.
Why does this break down at the country (as opposed to the individual) level? Does it break down at all? Where’s the bubble?
On a more fundamental level, we can see cash flow but not any kind of balance sheet at the country level. Why is that?
(I apologise if this post looks like an exam question. Old habits die hard, I guess. But I’m not trying to grade you on this, I don’t know the answer, and I’d be interested in the answer if there is one.)
Not a silly question at all, SJ, and still an open one. I’ve added a link where I can respond.
I think the case for a fallacy of composition is particularly strong in relation to a housing boom. We can individually realise our capital gains in housing, but if we collectively sought to do so, we would need to sell large components of our housing stock to foreigners. Despite all the stories of rich HongKongers buying up property at the upper end of the market, I doubt that this is feasible on the required scale even for upper end property and certainly not for middle and lower end.
When banks borrow capital from overseas, is it not true that they are contributing to nett national indebtedness?
Thus, to use JQ’s HongKonger as an example, she doesn’t have to buy a house in Australia to be engaged in the Australian housing bubble. If she lends money to the National Australia Bank in the form of bonds and then the NAB on-lends that capital to domestic homebuyers, (or people who borrow to take a holiday, or for any other purpose) then the liablity for the debt to the rich HongKonger is distributed by the NAB among its borrowers.
The NAB is therefore in a comprador relationship between the rich HongKonger and Australian borrowers, taking its service fees, etc.
The question the rich HongKonger must ask herself is whether there is an acceptable risk that the NAB will be able to manage its non-performing loans.
Over the past couple of decades, the average net assets of average households in western countries has increased significantly mainly through house price appreciation.
I suspect that this is a signficant factor in the low nominal savings rates – if your house and shares increased in value by $20,000 why worry about spending $500 more than your income?
It’d be interresting to know if this trend has also contributed to the moderation of the economic cycle in the US and Australia – Australia IIRC hasn’t had a recession for over a decade, the US had an unusually short and moderate recession aft the Tech Crash followed by an unusually slow and moderate recovery.
If most households have substantial assets to fall back on, the fall in consumption durign a recession may be moderated.
Well done guys!
Never knew blogging about economics was this much fun!
Ian, we don’t know if that’s really the case just yet.
Very recent history tends to be seen without much perspective…
especially if we are personally involved, or borrowed too much, or are still trying to borrow more, or your job’s on the line, or want to sell out of your Sydney flat, just because we happened to fluke a tax cut from a weak leader trying to buy noisy vested interests…
I think there’s a bit of truth in all your perceptions, the question is where are the dominant trends leading us, and where do the chips finally fall?
Some of the questions you ask are answered here Ian http://www.economist.com/finance/displayStory.cfm?story_id=4079027
“According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries’ combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America’s stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.”
Given such an historically high trend an explanation would be to look for historically high explanations. Baby boomers driving the demand for assets, aided and abetted by lenders in developing countries. The same demographic that produced an unprecedented stagflationary environment in the 70s. Now booms and busts occur from time to time, but the demographics of this unprecedented boom may produce one hell of an unprecedented bust. Investment in rising assets has one goal for boomers-Its cashing out for retirement income. They can’t all sell at once without affecting the price. Quest: When are they as a group going to become net sellers instead of net buyers. This of course includes their super funds. The oldest boomer is now 60 yrs of age, but a trickle of them have begun to cash out about 5 yrs ago.
Here’s one of the immediate problems of the clamour for assets http://news.ninemsn.com.au/article.aspx?id=54930
Of course you could immediately reduce demand for housing(and by inference its price) by tailoring immigration to maintain ZPG(ie to make up the balance of our negative Net Reproduction Rate) which may make sense given water supply problems and sagging infrastructure in migrant destinations like Sydney and perhaps Melbourne. Then you need to decide what type of migrants you want. Young, fit, skilled, business, capital rich or the Centrelink hungry. Enter Professor Fraser stage right.
observa,
I was half agreeing with you in some of those issues, but please let’s leave RACISM out of it!
observa,
I was half agreeing with you in some of those issues, but please let’s leave RACISM out of it!
http://www.fightdemback.com/2005/08/04/fraser-media-frenzy-an-abuse-of-freedom/
..Some commentators criticised us for supposedly suppressing Fraser’s academic right to preach race hatred in class if he wanted (in classes on corporate governance? Public law?) But would they have defended us if the violence he predicted had occureed and students got hurt?
I am also a passionate defender of free speech, subscribing to the saying attributed to Voltaire: “I disapprove of what you say, but I will defend to the death your right to say it.� Accordingly, I have not prevented Fraser from saying anything.
But free speech brings responsibilities as well as rights, which Fraser has flagrantly disregarded. All societies that subscribe to free speech have laws governing its conduct. Macquarie has a negotiated code of conduct, which clearly states academics may use their titles when commenting on a matter relating to the academic area of their appointment. They may also express their views publicly on any matter as private citizens, but not to draw on the university’s name or their title.
As a NSW Tertiary Education Union spokesperson pointed out, Fraser has abused his academic position by associating Macquarie with his statement of private views.
Di Yerbury is vice-chancellor at Macquarie University in Sydney
“They [boomers] can’t all sell at once without affecting the price. Quest: When are they as a group going to become net sellers instead of net buyers. This of course includes their super funds. The oldest boomer is now 60 yrs of age, but a trickle of them have begun to cash out about 5 yrs ago.”
Interesting issues. Does this outline of the scenario approximate likely developments?
1. Unless boomers expatriate their pensions, they remain in investment vehicles not so different from where their super is now.
2. Pension drawdowns distort current consumption patterns (more incontinence pads, etc.) but don’t alter in any major way gross levels of consumption.
3. Boomers sell their large suburban houses and buy smaller inner suburban units or resort units, thus distorting patterns of demand for housing. Suburban houses decline in value relative to aforesaid units. But no dramatic aggregate change in the demand for housing.
4. The baby boomers die on Harleys in an attempt to recapture their youth, or dwindle away via nursing homes and are mostly gone by about 2035. The former leave a surplus in pension funds (or very thankful heirs). The latter cost the state money in nursing home infrastructure and services, again distorting investment decisions and the labour market.
The demise of the boomers thus seems to be more prolonged and more gentle on labour and capital markets and demands for public goods and services than
1. their sudden arrival in the 1950s.
and
2. even their enormous appetite for investment property from the late 1990s to the present.
I think the phenomena in question is broader than the recent bubble in housing prices.
People are living longer, accumulating more assets and passing them on to a smaller number of children.
The old Economics approach of treating savings solely as current income minus current consumption looks a bit defensible these days.
Maybe we need to be measuring per capita net wealth (possibly excluding volatile components such as housing) as a percentage of per capita GDP rather than savngs as a percentage of income.
I G
Here are some other ways of looking at it from the ABS, you can take out what ever volatile components you like.
http://www.abs.gov.au/ausstats/abs@.nsf/dc057c1016e548b4ca256c470025ff88/365efd1e06587aabca256bdc00122403!OpenDocument
http://www.abs.gov.au/ausstats/abs@.nsf/94713ad445ff1425ca25682000192af2/87bdcc8d7ca25079ca256bdc00122414!OpenDocument
One of the major problems with the analysis of borrowing and savings is that we aren’t comparing apples with apples. While levels of indebtidness have increased, this has been a function of the deregulation of financial services – hence previous borrowing patterns are no longer a good yard stick for current and future practice.
Observa says that:
“the demographics of this unprecedented boom may produce one hell of an unprecedented bust”.
The problem with this analysis is that it is assumed that there is going to be either a fall in demand or a major increase in supply or a significant change in the factors effecting either of these in order to cause a price decrease. I remain a sceptic of this predicted aging based property bust. Very few Australians are comfortable with the idea of selling off their principle residence, despite many talking about down-sizing. At the same time the factors that effect house prices remain under pressure. And while I acknowledge that the favourable tax treatment of investment property has been part of the reason for increased house prices, other factors are more important – scarcity of new land, scarcity of desirable locations and an increasingly wealthy population, to name a few.
It has also been argued that draw-downs on superannuation are going to cause some type of asset crash. This ignores the fact that income streams will be the major form of draw down, rather than lump sums. At the same time there is a continually growing stream of superannuation looking for a place to be invested. Both of these factors will significantly ameliorate the forecast baby-boomer crash.
Finally, any analysis that ignores capital gains appears to be significantly flawed in my opinion and I am suprised that peer reviewed work would be allowed this weakness.
“observa,
I was half agreeing with you in some of those issues, but please let’s leave RACISM out of it!”
No Carlos I should qualify what I meant here. I was referring to his particular conclusion about withdrawing from the obligation of the UN WRT refugees. In other words we should not take the ‘problems’ (settlement costs and short to medium term Centrelink problems) of the third world on board, but rather concentrate on business and economic migration(eg middle class educated black doctors or capital rich business entrepreneurs from Africa are fine) This could of course be coupled with more humanitarian aid. Fraser did of course refer to specific refugees from Africa, but his point was broader than that. Clearly not all refugees come from Africa, albeit strictly business/economic migration would clearly see some defacto racial/cultural discrimination.
Razor
. “while I acknowledge that the favourable tax treatment of investment property has been part of the reason for increased house prices”
I do not seem to see any “favourable tax treatment of investment property ” so your “other factors are more important – scarcity of new land, scarcity of desirable locations and an increasingly wealthy population, to name a few.”
Property in comparison to other asset classes is very heavily taxed. Compared to securities in the financial markets; property has nearly 5% stamp duty on purchase, stamp duty on the mortgage, land tax, municipal and water rates. Securities benefit from not having these impositions as well as having the advantage of franking credits. Both classes can be negatively geared and rank equally under the capital gains tax provisions.
Yet the ‘Revenue Lobby’ think it is really productive to give tax breaks to perpetuate the life styles and fat pay packets of the Murrays, Mosses and Cuffes of this world- allowing them to shovel our money around while also slowly lining their own pockets with it. At the same time they are doing this they also distort the property market by having stupid taxes like land tax that go straight into the pockets of low income tenants.
Yep, you got me on that one Econowit – I pulled the trigger a bit early – I mean for Christ’s sake, I show my clients why real estate investment is tax-disadvantaged.
I think the line I was trying to head off down was that complainants about high property prices roll-out the CGT/Negative gearing impact argument.
I”l just bang my head on the keyboard a few times.
Oh, and also the reason so many Australians go into property investing is that they believe it is one of the most tax effective ways of investing. Doesn’t mean it is true, but gets them in.
The “free speech brings responsibilities” argument is spurious, unless it is meant to signify that the buck stops at the individual. It does not mean that free speech involves a trade off requiring the individual to give up rights, that the system of rights is in fact an existence within an external system that confers them and demands a quid pro quo.
It’s like saying that providing a health service, claiming it is free, then confers a right on the providers to dictate your activities for the sake of your health. Not unless that was the original deal, it doesn’t – it was sold as “free”.
But health services could at least be brought in with a quid pro quo. Real intrinsic rights were there in the first place, and the only complaint that can be made about its “abuse” is that doing so is not really in the individual’s interests any more than crying wolf is. But there is no accountability for crying wolf, only repercussions. If some of those involve protests, that doesn’t amount to a justification for the measures the protesters call for, only that the idiot was asking for trouble – he doesn’t actually deserve it as legitimate retribution, any more than a late night stroller getting mugged.
Que????
The ‘Revenue Lobbies’ misguided mantra of knowing what best to do with our money is a worry at the best of times. Extracting exorbitant taxes for them to waste is bad enough, but mandating everyone to put 9% of their incomes aside to inflate a highly speculative asset class, that already has major tax concessions is madness.
It appears manifestation of this madness is evident with the early signs of a bubble in the Australian financial markets. This mandatory pouring of monies into a funnel with a restricted orifice, could in the long run have catastrophic consequences for everyone’s wallets including the ‘Revenue Lobbies’
>we should not take the ‘problems’ (settlement costs and short to medium term Centrelink problems) of the third world on board, but rather concentrate on business and economic migration(eg middle class educated black doctors or capital rich business entrepreneurs from Africa are fine)
Another case where Government “picking winners” is okay?
Good thing Arvi Parbo wasn’t subject to such a test.
The developed world hiring away doctors and other professionals educated (usually at public expense) in the developing world and siphoning off business talent is likely to perpetuate poverty and undevelopment.
Ever meet any refugees Observa? Most of them, regardless of their level of education, are smart, tough self-reliant people – the ones who weren’t never made it this far.
Was the man from Barcelona asking “que” about my comment or another?
Yes, PML, was that meant to go somewhere else?
economwit – While I am generally a free-market type thinker I will say that I believe our superannuation system is a world class solution to a significant problem. It ain’t perfect, but it is about the best going a round. (Disclaimer – I make money advising on super)
You also claim “with the early signs of a bubble in the Australian financial markets” – where is the evidence. Stockmarket valuations are within long term valuation parameters. The pRice-Earnings ratio of the market isn’t anywhere near a bubble – fair value yes but not over-valued.
Razor & economwit take a geek at the RBA’s submission to the productivity commision on this.
They strongly argue for a reform of the depreciation rules which are unique to property.
Interesting that last year was the first year where interest expenses was greater than interest income on investment property.
Razor is correct on Super.
Razor
I am not against our superannuation system per se. Setting aside 9% of income for retirement is a good thing. My concern is what is done with the money once it is set aside. This is a huge amount of money growing exponentially every year. Nearly all of it is channelled into the Australian financial markets and the bulk of that goes into equities. In the long term I think that is risky. I know personally the head of one of Australia’s largest managed funds and few other people involved in the property funds industry and they all tell me the same thing. “That is” they are awash with funds and have trouble employing it. I am not offering a solution to the problem merely pointing out I think there is one.
Stockmarket valuations and intrinsic business valuations of companies listed on the exchange are sometimes two different things. Stockmarket valuations are qualitative estimations of past events projected into the future to arrive at a figure. As long as these projections turn out to be close to the intrinsic business valuation, there won’t be any problems. The only uncertainty in dealing with the future is the future. I don’t profess to be able to predict the markets direction, although in the Australian stockmarket we have just experienced a few years of double digit growth- that rarely happens and when it does it is followed by something bad.
HP
I have not seen the RBA report (do you have a link) but I presume they want to scrap or curtail depreciation for properties. Depreciation is not “unique to property”. Depreciation is just an accounting method for a legitimate business expense- that is “the wearing out of plant and equipment”. A truck driver can depreciate his truck over time because he has a capital expense to buy it, then it looses value over time- a genuine expense of his business. Buildings or carpet are no different. The land might increase in value but the building and improvements will wear out. And as such are a legitimate expense of that type of business. So I can not see why they would want to get rid of it, but nothing surprises me.
I can not see the interest expenses being greater than the income on investment property for long. Some properties in the Eastern suburbs of Sydney have dropped so much in price that they are on a 7% rental yield – very difficult to negatively gear. (source AFR 4/8/05).This coupled with the slow down in new stock being built is going push rent yields even higher.
The other side of the investment coin here http://www.news.com.au/story/0,10117,16160123-29277,00.html
Here’s a link to the exec summary, which includes a link to the full submission. The exec summary says:
So it doesn’t look like the RBA tried to argue that property depreciation was unique (though I haven’t read the full report).
observa,
Based on those figures my “weight of supa money theory” pushing Australian equities is wrong. ASX market capitalisation $ 970 billion, Australian ASX ownership about $ 350 billion, new foreign money in 2004 $165 billion most into Australian equities.
Do you know roughly how much money is collected each year from the supa levy, I presume it would only be a fraction of the hot funds coming in from overseas?
SJ.
The RBA report is a typical example of a prominent member of the ‘Revenue Lobby’ using disinformation to promote their agenda of increasing taxation revenue.
The report was lodged by the RBA in November 2003 at the height of the last property boom to the Productivity Commission’s (another prominent member of the ‘Revenue Lobby’ ) Inquiry on First Home Ownership. The report is probably less relevant now in todays subdued market than it was when it was tabled at the height of the boom.
The report primarily focused on negative gearing and targeted it as an area for increasing revenue. It also focussed on a minor discrepancy; depreciation being deduction at a marginal rate and any difference of the diminished residual value of the plant and equipment to the book value being taxed on sale at half the marginal rate. It inferred that these two issues could be a cause of the recent price escalation and that they were the primary things that warranted a review. Its argument for this rational was that our policies on these issues differed from what happened overseas. The problem with this argument is that no two countries have the same rules on these issues. The RBA only focused on issues in isolation without looking at the full gambit of taxation regulations in the comparison countries.
What the report failed to do was even mention the GST and how its introduction greatly added to house price inflation. The introduction of the GST caused great escalations in the costs of construction and repairs and to land costs in the subdivision stage. It also neglected to explore the implication and effects of investors and owner occupiers being impute taxed for GST purposes. It also failed to address how the GST in the development stage is levied on other taxes like stamp duty and land taxes (tax on a taxes). These highly inflationary issues being overlooked is conspicuous by their absence in the report and can only be explained as ‘Revenue Lobby’ bias.
To the RBA’s credit they did indicate that the 30% increase in the rate of stamp duties over the last few years by bracket creep had made it harder for first home buyers and some thing should be done (and well done Bobby Carr on this issue). But they failed to acknowledge how this massive increase in stamp duties added to house price inflation due to the sheer size of the rate increase. They also did not even entertain the idea that the massive stamp duty increase would inhibit turnover, thus constricting supply adding to house price inflation.
It should be noted that the introduction of the Capital Gains Tax in the mid 1980s (in a similar period of slow adjustment to high marginal tax rates) was followed by a property boom that in percentage terms was bigger than this one (source this RBA report). The introduction of GST, other recent increases in taxation and impositions on the property sector coupled with a similar period of slow adjustment to high marginal tax rates, have had the same booming effect. When will the ‘Revenue Lobby’ learn to get of our backs?