The Case Against Property

House prices in the US have fallen 16.3% over the last 12 months; in the UK the market is now down 12.4%  and in certain bubble areas the falls have been truly spectacular – for example homes in Las Vegas and Northern Ireland have lost a third of their value, whilst Miami has suffered a 26% fall. But it’s not just the Western world which is witnessing a property market crash – even prices in booming urban Chinese cities and over-populated Hong Kong are now falling.

So can Australia remain immune?  Quite simply Australia’s property market will turn ugly very quickly.  Here’s why;

Firstly, it’s important to understand what factors drive property.

i) Supply and Demand  – e.g. immigration, land zoning, building approvals.

ii) Price – the price of a house relative to earnings, and the availability of funding (how much deposit you need to put down and the mortgage rate). 

And then remember that every bubble has a hook. The Tech bubble’s hook in 2000 was the that the internet would exponentially increase the productivity of business. The hookfor Australia’s stock market bubble last year was that China would grow at 13% every year. And the hook for the property bubble?   How many times have you heard the following –   

Property never goes down..

Immigration will ensure prices stay high for a long time to come..

Firstly it is true that demand will increase (net immigration) and supply is not keeping up (especially in NSW). This is fundamentally supportive of the Australian property market. But it is not the primary reason as to why property prices have risen so much over the past decade (more on this later). The immigration and tight supply argument is even more relevant to the UK market but this hasn’t prevented prices from rapidly heading south.  So clearly something else is at work.

Supply and demand cannot propel home prices forever. There are millions of Australians who would like to drive a Porsche 911 and yet there are only a few thousand on the roads. Why?  Because even though demand is there, the price is too high.

Quite simply, as this chart demonstrates, Austrailan housing has never been more unaffordable.  And this is with 100% employment.

 

 

 

 

 

 

 

 

 

 

 

 

Second, there is much talk about the increase in rents making property yields more attractive. However, as this graph shows, yields are still pathetic. And the ‘official’ published data don’t take into account minor items such as depreciation costs, agents fees, repairs etc etc. The net yield is at least 100bp lower.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So why have prices risen so much? This chart suggests that availability of funding and a willingness to borrow on the part of the consumer are far more important than a supply and demand mismatch.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding is disappearing fast as 100% mortgages becomes a distant memory. Required downpayments will increase from nothing to 20%, and mortgage rates will stay high despite the RBA progressively lowering interest rates. And the poor Australian consumer is already up to his eyeballs in debt. The ratio of household debt to disposable income has doubled to 160% in just a decade (coinciding with a near tripling of property prices).

Finally, who would want to buy into this market?

81 thoughts on “The Case Against Property

  1. Pommy surely the availability of funding is a crucial aspect of the level of demand? If funding is now much less available then the demand must fall and prices with it. But the market is not uniform and some prices (units and holiday homes) will be affected more than others.

    Is it really true that people think house prices cannot go down? Or would it be more accurate to say that people believe house prices are less likely to fluctuate wildly?

    My recollection living in SEQ is that the gold coast can go up and down like a yo-yo, but inner brisbane tends to stagnate rather than plummet, and that stagnation can last years. Outer brisbane, can slide. Mature suburbs are a lot more stable and new areas are prome to price reductions because the project home builders price on affordability in the lower middle class and that part of the market is more subject to income shocks.

    Construction cost increases have been a problem for a good part of the last decade.

  2. Oh, and hasn’t there been substantial over-building in the most affected markets? Imagine what will happen in Dubai.

  3. Good post Pommy, but I think you overlook a few things.

    Demand is not only driven by immigration etc but by the Great Australian Dream. Owning your own house is embedded in the culture. People will strive to buy a house irrespective of whether it makes financial sense.

    Your analogy with cars: There are millions of Australians who would like to drive a Porsche 911 and yet there are only a few thousand on the roads. Why? Because even though demand is there, the price is too high. is not valid. Lots of people could afford a Porsche (they are only $200K) but choose not to. That’s a lot different from owning a house, where people will willingly overcommit to own one.

    Demand is also affected by the rental market. With rents high and rising, many people conclude they might as well be paying off a mortgage. The suffering is the same.

    In my view the growth in home prices is at least partially due to a lag effect of deregulation of the financial market that began in 1983 (home lending was previously rationed). It’s quite likely there is a new ‘normal’ level, although I’m not disputing there might be a bit of a bubble.

    Having said that, I’ve seen two previous markets where average real estate sale prices fell. The effect was greatest outside the inner city areas and in non-traditional categories. However, it was driven by unemployment rather than the banks refusing to lend money. So unless people start to lose their jobs I expect mostly flatlining for a couple of years.

  4. So unless people start to lose their jobs I expect mostly flatlining for a couple of years.

    David, I actually think that it will take some surprises for property prices to even flatline. Or more importantly, the other indicators above, such as ratio of property prices to household debt, and return on investment, are almost certainly going to return to sane levels.

    It would take a stream of good news; wage growth, lower interest rates and plenty of credit availability, to maintain or slightly lift house prices.

    The old adage that property prices always go up is not holding firm in most people’s minds. Interest rates are high, and auction clearance rates are sharply down this year. So people are quite comfortable to sit on their hands and wait.

    Once buyers dry up, the sellers are going to inevitably lower their asking price, no matter how enthusiastic their real estate agents are in trying to hype up the market.

  5. Zoning laws can affect land price in a big way. However there’s probably no reason to think these laws will change in the near future?
    I saw a stat a while back showing that over the last two decades or so building costs had gone up slightly but that the price of land had gone up 10 fold. This was attributed to stricter zoning laws initially set up in the late 70s I think.

    Another regulatory example: Recently in Adelaide, OHS regulations now require scaffolding for all builds above 2m high – this has put up the price of building by about $10,000 for an average home.

  6. Actually, having been lucky enough to live in Hong Kong and a number of big cities in Aus, I’ll bet for stagnation in the big cities of Aus rather than a big dig (apartments excluded). The reason for this is that there is a huge difference between the markets in that if you buy somewhere in a place like HK, you are essentially buying into something where it is simple to replicate what you live in given the money tommorow. Someone will just build another skyscraper with a thousand new appartments in it. This is why there is a massive oversupply of appartments (I assume the same is true of many places in the US).

    Alternatively, if you buy a house in Australia, then you are getting a bit of land with it, and in all of the big cities, the good places are basically all taken and the turnover is also quite low. You are also not allow to build a giant skyscraper on it. Therefore, your investment is protected from competition in a way that it is not in Hong Kong. Now you might argue that the land is priced into appartments in HK too (which is true, it’s terribly expensive). However, the land in HK is priced more as an imaginary measure, because if you happen to live in the poorish neighborhood 10 kilometers from Central, it won’t make much difference to your life — your appartment will be essentially the same, there still won’t be much crime, and you will still get to work in 20 minutes. The main difference is that you won’t be able to tell your friends that you are rich, which is something Chinese people like to do in prosperous times, and hence what drives the speculation. Alternatively, if you live 30 kilometers away from central in Sydney or Melbourne (which will give you the same sort of rich-poor differential as HK), it will make a huge difference to your life. You won’t be able to get to work within 1.5 hours, your neighborhood will have a lot of crime, you will live in fear if you take the train so you will have to spend more on your car, your school will be filled with children whose parents think that learning to read is only for girls, and there won’t be any doctors or anything like that. So despite the fact that you spent far too much buying property driven up by speculation in a time of great prosperity, you will have far less motivation to move. The government will also subsidize people to stay in the neighborhood you want to buy into via pensions and the like, which will also keep prices high. I therefore think prices can remain more inflated in Australia.

  7. The only factors are supply and demand. Price is a consequence of supply and demand. Supply remains restricted while demand is going to be inconsistent. Property prices will go up, stagnate, or go down depending on the property in question.

    Pommy worries too much.

  8. But John, to what extent has demand been driven by speculation, facilitated by extraordinarily easy credit over the last 7 or 8 years? Exhibits 1, 3 and 6 are consistent with this hypothesis. And now that credit is drying up fast, will that speculative demand rapidly evaporate?

    You look at things very much in abstract economic terms.

  9. Unlike the USA there is little scope for debt burdened Australians to hand back the keys and walk away.

    I suspect the yield issue is important both in rental terms and in capital gain terms. I suspect that the latter has run out of steam for now so the rental yield has to be competitive with interest at the bank. If interest rates head north then property will crash. If interest rates are low then thinks will probably drift sideways.

  10. That last graph showing the alleged bubble doesn’t look too bad to me… anything with steady compound growth will look exponential. Of course, it aint a smooth line, and they’ll be blips and corrections along the way, but she’ll be right.

    Our disposable income is artificially low when one considers the amount locked up in super. Give people easier access to their super for their family home, and you’ll see an influx of money into the market.

  11. Me – easy credit IS a supply factor – an oversupply of money that engenders a demand response.

    This isn’t abstract, this is quite black and white.

  12. Mark – I’m not an economist, but that was my understanding. And hasn’t the credit crisis caused a sudden and large decrease in money supply? I expect there’s an argument along the lines that central banks should provide liquidity to prevent or cushion this, however it doesn’t seem to have been working so far since August last year. And if there is a sudden and large decrease in money supply, wouldn’t this cause a sudden and large decrease in demand for property?

    In my crude, non-economic view of things, this seems inevitable because a reasonable proportion of recent demand for property has been speculative, i.e. bought on the assumption it could be sold at a higher price in a relatively short period of time. That is borne out by the increasing proportion of debt to income, the decline in yields and the decline in affordability. That speculation is likely to be coming to an end as availability of credit comes to an end. I don’t know how to express these thoughts in an economic model.

    It just seems to me that to say property prices will go up, stagnate or go down depending on the property in question (while obviously true) understates the situation a little.

  13. #10 Terje,

    I don’t understand what you mean. If someone can no longer pay their home loan, the bank takes over (they already hold the deed) and can throw them out. Can’t they?

    If so, how is that different to the US?

  14. Yea bu in Oz the bank can also go after you for any further losses. In the US the bank is only entitled to the house and that’s it.

  15. E.D.

    In the US many home loans are made on a non-recourse basis. This means that if a bank enforces and sells a secured property, but the proceeds of the sale do not pay off the loan in full, the bank is NOT able to pursue the borrower personally or pursue any of their other assets to recover the remaining outstanding amount of the loan. In many states of the USA, this is the law prescribed by statute.

    This is not the case in Australia. If there is a shortfall after selling the secured property, a bank is able to sue the borrower personally and, if payment is not forthcoming, apply to a court to seize other of their assets or put the borrower into bankruptcy. In many cases, it wouldn’t be worth the banks bothering because the costs of pursuing the borrower may outweigh the likely recovery, but sometimes it may be worthwhile and banks may do so anyway to ensure there is an incentive not to default or walk away from the loan.

    So you can see that on a non-recourse basis, if your property is worth less than the amount outstanding on your loan, the rational decision would be to mail the keys to the bank and walk away – they can’t pursue you for remaining portion of the loan. But where the bank does have recourse against you personally, the rational decision would normally be to continue toiling away making your payments of interest and principal to avoid defaulting on the loan. The latter scenario, which prevails in Australia, ought to soften the losses suffered by the owners of the loans (i.e. the banks).

  16. Actually, you’d think that law would make banks less likely to make sub-prime loans… except that the CRA pretty much requires them to.

  17. Between 2001 and 2006 housing prices is my southern Calfiornia home of Riverside tripled (and in a few cases went up 4 fold). Homes used to go for $100,000-$150,000 and entered into the $350,000-$550,000 area very quickly. People bought them like hot cakes (also adopting a $5000 per year property tax bill!). Cheap money made very expensive houses and now people will be unable to pay their huge debt for houses worth a fraction of the amount they paid.

    Getting in ALOT of debt became very easy and people took out huge sums of money for a house.

  18. Actually Fleeced, up until August last year, everyone agreed that subprime loans were a great advance for equitable access to finance. Now, of course, everyone recognises that they were clearly preying on the vulnerable to line bankers’ pockets…

  19. Now, of course, everyone recognises that they were clearly preying on the vulnerable to line bankers’ pockets

    Jeez Me, are you biased or what?

    The only reason bankers offered subprime loans was because the government officially encouraged them and gave a de facto guarantee via Fannie and Freddie. In other words, the bankers were responding to incentives created by GOVERNMENT.

    Now let me hear you criticise politicians who screwed the market to get elected. They’re the real cause.

  20. David, don’t you understand? Governments never make mistakes. When something goes wrong, it is *always* the fault of someone else. Always.

  21. Me; not everyone agreed, bush tried to get it under control in 05 but was blocked and McCain has been warning of this for at least a couple of years.

    Even Bill Clinton now claims that he wanted it stopped way back when …. although the whole thing was really started as a feel good social engineering policy during his term.

  22. Lots didn’t agree with it ME. Bush tried to change things in ’03, and McCain was leading the push in ’05. Both times were votes down, largely along party lines.

    In the 90’s, Citibank was sued for not offering enough sub-prime loans… since a disproportionate number of poor people are black, it’s racist not to lend them money!

    ACORN in particular, was aggressive in it’s pursuit of such cases and in promoting sub-prime loans. What do you think “community organisers” do?

  23. Dudes, take a deep breath – I was being sarcastic. Just noting the contradictions of certain popular beliefs.

  24. There’s one area of the RE market Pom’s prediction is right. The top end is fucked as a result of the losses in the stock market. The Melbourne market $3 millon + is down 20%+.

  25. Sorry, Me… it’s hard to tell sometimes 🙂

    Unfortunately, most people will be blaming the current mess on the “failings of capitalism”.

  26. David, don’t you understand? Governments never make mistakes. When something goes wrong, it is *always* the fault of someone else. Always

    E.D you couldn’t be more correct.

    I just watched this excellent Youtube video about credit markets, where towards the end, an economist laughingly jokes that governments are never at fault for the crisis at hand:

    And today, Our thuggish Prime Minister is blaming this on “extreme capitalism”:

    —————–
    http://www.theaustralian.news.com.au/story/0,25197,24451390-601,00.html

    KEVIN Rudd has urged international leaders to end an era of “extreme capitalism” and reject the notion that “greed is good” by embracing a new world order of global financial regulation.
    —————–

  27. For all of you ALP supporters who were trying to reassure libertarians and free-marketers that Kevin Rudd was no worse than John Howard, I want to you to read every single word of hateful bile spewed by Rudd.

    I could not imagine Howard ever giving such a hate filled diatribe against capitalism and free trade.
    ———————————————–
    http://www.theaustralian.news.com.au/story/0,25197,24451390-601,00.html

    We’ve seen the triumph of greed over integrity; the triumph of speculation over value creation; the triumph of the short term over long-term sustainable growth,” Mr Rudd said.

    “It is perhaps time now to admit that we did not learn thefull lessons of the greed-is-good ideology. And today we are still cleaning up the mess of the21st-century children of Gordon Gekko.”

    Mr Rudd said such ideologues always argued that the market knew best except when there was a crash and then “the self-same ideologues argue, having privatised their profits, we should socialise their losses – and, by the way, having demanded lower and lower taxes all the way through”.

    “This culture was never challenged by a political and economic ideology of extreme capitalism,” he said. “And this crisis bears the fingerprints of the extreme free market ideologues who influence much of the neo-liberal economic elite.

    “Free market ideologues who have a naive belief that unrestrained markets are always self-correcting and that markets left to themselves will always achieve optimum outcomes.”

  28. Rudd shat in his nest a few weeks back with his attack on Hayek. The true nature of the man is starting to become obvious.

    But Rudd can blather all he likes about the evils of free markets. He’s still got to get the approval of cabinet to do anything. I still hold out hope for Lindsay Tanner and perhaps Wayne Swan.

  29. Jono, The primary principle mess to clean up (the elephant in the room which PM Rudd dare not mention, “as yet”) is labor state land supply regulations in conjunction with local councils and the election pork barreling which has allowed labor governments to price gouge the housing market in their green left wing quest to house us in so called sustainable high density housing, (gulags). Green Labor Governments forgot the economic & social sustainability part of the regulatory equation,as part of their conveniently failed competition reforms.If you think I am wrong, then let us canvas these subjects directly with the masters of land supply distortions, Rudd, Emmerson, Swann, Keating, Richardson and Co etc.

  30. Good luck with that David. I can’t see the lieutenants reining in the captain.

    This line is especially scary:
    “Mr Rudd called for a new “debate that brings to a head how we shape the reward structures of corporate Australia.””
    Does he really think that the government can best work out how executives should be paid?

    I suspect that we are about to find out what really happens when you elect a nastly little control freak with a double helping of hubristic self-confidence.

  31. He’s certainly a little control freak and self-righteous fuck, but I don’t know how much self-confidence he really has; he always looks nervous to me. I reckon if he was cornered on a difficult policy issue he’d squeal like a three year old girl.

  32. Does he really think that the government can best work out how executives should be paid?

    Quite possibly, but if that’s his focus it’s not likely to be a calamity.

    While it is quite clearly no business of the government, management interests and shareholder interests have noticeably parted company in some high profile examples. As a shareholder I would like to see executive remuneration linked much more directly to shareholder remuneration (ie EPS and/or franked dividends).

    I find it amusing that the US bailout will include a cap on the executive salaries of firms that accept the government’s money. Those personally affected will face the exquisite dilemma of choosing between their own interests and those of shareholders.

    There’s no practical way to regulate executive remuneration without killing the golden goose. But if Kruddy causes a light to be shone in the dark corner and sends some cockroaches scurrying, it might not be all bad.

  33. He will cause the light to go out, David. After this mess is out of the way, Firm will gradually get privatized limiting the variety of stocks available to Ozzi investors. They will not be able to limit executive compensation as it’s no one’s concern other than the management and the stockholders. The reason why comp is so high is that good executives are in real short supply.

  34. I agree with most of what Rudd said, actually. What I don’t agree with is the idea that more government regulation is a good solution.

    When capitalism focuses on short-term gain over long-term growth there can be problems. When greed is placed ahead of integrity businesses do lose their way. When speculation is valued more than value-creation something isn’t quite right.

    And he rightfully criticises the kinds of capitalists that ask for tax-cuts when things are good and ask for subsidies when things are bad. To do such is disgustingly self-interested and should have no part in a free market.

    I believe that free markets are not enough. We also need conscience and integrity. But government is no help there.

  35. Shem, Please.

    Everyone is greedy and everybody looks for life boat when things get rickety. We know human nature. It’s the government’s job not ot give in to those sorts of pleas.

    Rudd has no fucking idea what he’s talking about. He’s clueless idiot.

    Bank’s are in the business of lending money. If they have capacity and a loan meets their criteria they will make the loan.

    people will borrow money if they think houses prices are going up.

    It’s the job of a central bank NOT to allow interest rates to play a part in speculation. Blaming it on greed is plainly stupid and Rudd is a stupid man.

    Would you argue the same principle for a local coffee shop down the road? Would you suggest they are being greedy if they found demand was increasing and they wanted to install a second machine?

    Would you say BHP is being greedy if they found China demand for coal increased by 50% this year and wanted to meet that demand with additional capacity? Would you?

    Banks are influenced by the same stimulus.

    Please, Rudd has nothing to teach anyone and Swan is even worse. These are very stupid people you’re introducing into the discussion.

  36. The reason why comp is so high is that good executives are in real short supply.

    That’s the theory JC, but in my experience it’s not only cream that floats to the surface. There’s a few turds and dead fish there too. Closely linking compensation to shareholder returns is the way to sort them out.

  37. Shem capitalism doesn’t focus on anything. It’s a concept. Individual managers and owners focus on things and they make their judgements on all of the relevant factors (including how silly they are). the complaint about short v long term thinking reminds me of past debates and especially about how smart the Japanese were with their long term thinking, just before they tanked.

    It’s a classic furphy to say greedy capitalists focus on the short term and the public benefits when people think long term. Longterm thinking is not bad per se, but it seems to me the business risk gets greater the further out you focus. I think it is also crap. Just who has surveyed the business world to determine the amount of short v long term thinking going on?

    I also hate the whole greed thing. Not because I’m in favour of greed, but because it is a distraction and an irrelevancy. If you say greed is bad and dangerous then you have to be able to identify the greed you want to proscribe (and just imagine drafting that legislation) and then think of a supervisory/regulatory mechanism to deal with it.

  38. And you’re going to have Rudd legislate for that, Shem? Great idea. You want those two nimcompoops making laws deciding what people can earn.

    And the over all effect. Good executives will move over to privatized firms and earn more money when they’re floated.

  39. And you still, haven’t explained how you can differentiate greedy to only apply to the bankers and not elsewhere, Shem.

  40. Shem:
    And he rightfully criticises the kinds of capitalists that ask for tax-cuts when things are good and ask for subsidies when things are bad. To do such is disgustingly self-interested and should have no part in a free market.

    Sorry to break out the dictionary here, but there is, by definition, no such thing as a capitalist who supports subsidies.

    You might be referring to “crony capitalism”, “special interests” or “corporatism”.

    But sorry, the definition of capitalism does not encompass subsidies for special interest groups.

    Call a spade a spade.

  41. No, jc, I don’t trust Rudd, nor any government to try and legislate compassion or conscience. But that doesn’t stop them from being desirable traits.

    As I said, I only agree with Rudd’s sentiment, not his policy proposals. I think it is fair for a Prime Minister to comment on the woes of society and to make speeches reprimanding people for excessive greed. I believe it should end at the speech, though. Regulation won’t stop greed, it’ll just increase resentment.

    Everyone is greedy in different degrees, but greed is obviously less relevant to people earning less. It is more fair for a person to be self-interested when they are struggling to afford house repayments. I think self-interest goes a bit too far with some multimillionaires, however.

    I do believe that productive members of society should be rewarded more, otherwise there’s no incentive to be productive. But we should all look to temper our greed as well. Those of us who are in advantaged positions should be grateful and consider what can be done for the less advantaged.

    When I talk about long term vs short term thinking I consider things like sustainable environmentalism. Deforestation of biodiversity hotspots is clearly short term thinking. Fishing the oceans dry. I’m not a conservationist, but I do think sustainability is important. Long term means future generations, I’m sure a lot of CEOs are only interested in medium term returns- things that will affect them while they are still CEOs. Their actions indicate thus anyway…

    I don’t want to stop them from being unethical with regulation. But I’m not going to support unethical corporations and I will speak out against wrongdoing where I see it. Being in favour of free markets doesn’t mean you get a hard-on over them, it just means you accept them as being better than government intervention. The lesser of two evils, I guess.

  42. “Crony Capitalists” are capitalists…

    I agree that capitalism shouldn’t encompass that, but that’s akin to saying socialism shouldn’t encompass corruption as existed in the USSR.

  43. Short/long term arguments are usually illogically based, Shem.

    Figuring out what the rate of return is over different periods of time is what allows for rational thinking.

    I think you’re confusing muddled or ineffective property rights, rate of return expectations and personal preferences.

  44. Isn’t it a bit rich for Rudd, a politician, to chastise businesses for only looking at the ‘short-term’?

    Do politicians look much beyond tomorrow’s headline or the next 5 second soundbite?

  45. What I mean is that something may not have a good return for me, but it might have a good return for others in future generations.

    It makes perfect sense for me to fish the oceans dry and make massive profits. My company won’t survive 50 years past my death because there will be no fish left, and people won’t be able to eat fish at all any more. But at least I was able to live well while I was alive.

    Even with clear property rights over oceans, CEOs and shareholders usually seem to limit the scope of their interest to their lifetimes. Except for those that do care about their legacy or others.

    A lot of CEOs and companies do do the right thing. But there are definitely some cases where short-term profit does seem to take priority… Short-term thinking often does punish itself and I applaud the rational thinking that avoids short-term thinking.

    Short-term thinking isn’t even always bad. But I do prefer to try and take a holistic approach to things myself. But the nature of a consumer society is to use and enjoy today and to discard tomorrow.

    People enjoy the short product life cycles because it means they get more fun from new toys. But it is a childish, narrow-sighted mentality that produces excessive amounts of waste. This isn’t a good thing, anyway you look at it. We need to be future focused, although it’s so easy to just enjoy the now. This is from a moral point of view, not a government point of view…

    People should feel free to do whatever they like. I just hope that people will choose to do “good” things, rather than bad. Because choosing “good” brings longer-lasting happiness and joy.

  46. Aren’t pensioners who want an extra $30 a week greedy?

    Aren’t pregnant women wanting to be paid while having a baby greedy?

    Aren’t uni students who want ‘free education’ greedy?

    Aren’t mortgage payers demanding lower interest rates greedy?

    Aren’t unions demanding ‘collective bargaining’ greedy?

    Aren’t car makers demanding more ‘protection’ greedy?

    Aren’t proponents of greater spending on public transport greedy?

    Aren’t those receiving the family tax benefits (A or B) greedy?

  47. What I mean is that something may not have a good return for me, but it might have a good return for others in future generations.

    Quite honestly, Shem, that’s a silly argument to make. How the hell would you know that the rate of return will be found in the things we’re doing now ou in the future? There’s no moral overhang on any living person to forgo consumption now to satisfy the wants and needs of future generations even if we could predict what those wants were. That’s what lefties always say as it ‘s pretty meaningless and more often self-serving. No one has any moral right to make these demands on living people to somehow satisfy he needs of unborn generations.

    It makes perfect sense for me to fish the oceans dry and make massive profits.

    Well change the way in which property rights are arranged then.

    My company won’t survive 50 years past my death because there will be no fish left, and people won’t be able to eat fish at all any more. But at least I was able to live well while I was alive.

    See above.

    Even with clear property rights over oceans, CEOs and shareholders usually seem to limit the scope of their interest to their lifetimes. Except for those that do care about their legacy or others.

    Well, yea a person’s life is pretty important, hey. Fancy them taking an interest in it.

    A lot of CEOs and companies do do the right thing. But there are definitely some cases where short-term profit does seem to take priority… Short-term thinking often does punish itself and I applaud the rational thinking that avoids short-term thinking.

    Okay, show a specific example where a firm has taken a short term decision that materially impacts on the future in a materially adverse way that was done deliberately to reduce future earnings. Do you have one?

    Short-term thinking isn’t even always bad. But I do prefer to try and take a holistic approach to things myself. But the nature of a consumer society is to use and enjoy today and to discard tomorrow.

    Fancy that hey. People like to have fun in their lives. Who would have ever guessed.

    People enjoy the short product life cycles because it means they get more fun from new toys. But it is a childish, narrow-sighted mentality that produces excessive amounts of waste. This isn’t a good thing, anyway you look at it.

    Why? The IPhone is a great product. If I were interested in phones I’d buy one in a second and dump the other phone. I think you’re confused here. People don’t discard things unless something superior comes along.

    We need to be future focused, although it’s so easy to just enjoy the now. This is from a moral point of view, not a government point of view…

    Well ok, but do your own morality thing as frankly it doesn’t interest me.

    People should feel free to do whatever they like. I just hope that people will choose to do “good” things, rather than bad. Because choosing “good” brings longer-lasting happiness and joy.

    Aren’t those your own personal; preferences though, that you think other people should live by?

  48. Somewhat, E.D, but greed to me, has an innate characteristic of excess and relies on a distinct lack of charity.

    It’s not greedy to want to eat, nor is it even greedy to want to eat cake, but it is greedy to want to eat a whole cake without sharing.

    It’s greedy to want another slice of cake, when you already have a whole cake and the person next to you has no cake.

    It’s greedy to eat a piece of cake if the person next to you has a breadcrumb.

    That’s my definition of greedy. And while I support a person’s right to be greedy it’s hardly a virtue and it’s definitely not something I promote or will defend. It is a vice, a vice I am happy to decry, but not a vice I think the government should ban.

  49. It’s not greedy to want to eat, nor is it even greedy to want to eat cake, but it is greedy to want to eat a whole cake without sharing.

    Sharing it with whom exactly? Personally I don’t really give a shit whether the neighbors 3 streets down have any of the cake.

    It’s greedy to want another slice of cake, when you already have a whole cake and the person next to you has no cake.

    Yea, who says? What if I don’t know the person and I always like to eat 3 slices.

    It’s greedy to eat a piece of cake if the person next to you has a breadcrumb.

    That patent nonsense. No one goes to bed hungry in Australia unless they choose to.

  50. JC, yup they are my preferences. And I am quite happy to get on my moral high horse and preach about the virtues of utilitarian living. In a society where religion is remarkably absent it’s important for people to stand up for morality based on sound, logical thinking and utilitarian values.

    People don’t discard things unless something superior comes along.

    The thing is, people are forced into discarding things because companies deliberately manufacture replaceable products. There is no profit in making products last, at least not making them last beyond a few years. Psychologists are hired for this kind of thing. Companies are great at manipulation and brainwashing. Look at how important brand is to some people. That doesn’t mean a product is superior- people often deliberately avoid cheap brands because of the image factor. Ridiculous.

    I agree with the left on a lot of issues. I just don’t agree with their solutions. I don’t like a lot of aspects of consumerism and corporatism. I just like it better than the alternatives.

    I personally believe that joy is far more important than fun. Fun is great, too, but fulfilment should be more relevant than enjoyment. Society nowadays is quite hollow and has lost touch with that. We’ve cursed ourselves to a shallow existence because we’ve found most of the bananas that make our internal monkeys excited. We’ve made things easy for ourselves, but with easiness comes laziness. With laziness, nothing productive is done.

    It’s not as bleak as the picture I paint. But so much of what happens in today’s society really doesn’t advance actual utility. It just enhancements our sense of utility. We might as well be living in the Matrix.

  51. Well i take a different view, Shem. I think the western world with the exception of the current banking crisis is great place to live. Food ins plentiful and terrific both in choice and quality. The gadgets we have are terrific. i only hope everyone has this sort of life in he future. Sorry bu the spartan, Calvinistic life you prefer doesn’t interest me or most other people either.

    Watching movies at home on a wide screen is great. the web is fun, multichannel tv is fun. Modern homes are great. I really don’t know what there isn’t to like. I only wish I could live forever to see what other great gadgets people would have to play with.

    I also think you are avoiding other issues with modern life. reducing pain and suffering with modern medicine is but one important example.

  52. “There’s no moral overhang on any living person to forgo consumption now to satisfy the wants and needs of future generations even if we could predict what those wants were.”

    Indeed… In fact, since those future generations will no doubt have a higher standard of living than we enjoy ourselves, to forgo a return in the present so that they can have a return in the future amounts to reverse welfare.

    And the solution to tragedy of commons is (almost) always privatisation, Shem… it may not be the perfect solution (everybody will always make wrong decisions at some point), but it is the best solution available. In your fishing example – they would indeed have more concern about over-fishing if they had property rights, since they’d be able to sell their property rights on retirement.

  53. It’s not greedy to want to eat, nor is it even greedy to want to eat cake, but it is greedy to want to eat a whole cake without sharing.

    It’s greedy to want another slice of cake, when you already have a whole cake and the person next to you has no cake.

    What if I’ve worked overtime to get the cake while the person next to me has done nothing productive? Is that still greedy?

  54. Shem,

    In essence, you are saying that people who don’t share their stuff are greedy. (Reads like egalitarianism?)

    But why should people share their stuff with others simply because others don’t have them? If it applies to cakes, then surely it would also apply to clothes, computers, jewellery, houses, cars, furniture, jobs, children, etc.

    Further, isn’t envy also a vice? I am not a religious person, but somewhere it says: thou shall not covert thy neighbour’s ass.”

    ——
    “Today, wanting someone else’s money is called ‘need’, wanting to keep your own money is called ‘greed’, and ‘compassion’ is when politicians arrange the transfer.”
    – Joseph Sobran

  55. And the solution to tragedy of commons is (almost) always privatisation, Shem…

    I never disagreed with this. All I’m saying is that while I may tolerate self-interest I’ll never endorse it 😛 I’m more interested in people that try and help others than I am people that try and help themselves.

    E.D I’m about maximising happiness. I don’t believe that my happiness is any more valid than another person’s if they are of the same degree. If I can sacrifice 1% of my happiness to add 200% to another person’s happiness, then that is the “good” thing to do. I’m not saying I always do that, I’m selfish too, but I try and evaluate the morality of actions based on the net outcome. “Greatest good to the greatest number”. Socialism provides “the lowest acceptable good to the greatest number”, I’m not at all in favour of socialism. But I am highly in favour of charity. Favouring capitalism doesn’t mean I favour greed.

    Egalitarianism is virtuous when it is done freely, it is not a virtue when coerced.

    Jc and Fleeced, I’m not totally decrying “toys”, just saying that they shouldn’t be our sole focus. We should look at sustainable production of toys. Yeah future generations might have wonderfully awesome X-boxes and cars, but it’d suck if the world had to lose half its species in order to reach that point.

  56. OK Shem, I think I understand your position… though based on your definition, I’m certainly no utilitarian. For example, I would rather the death of 10,000 strangers on the other side of the world than of any one of my immediate family.

  57. Fleeced- my boyfriend hates me for being utilitarian and being so ready to throw him under the bus :p But it’s just how I see the world. Of course I do believe certain individuals may lead more valuable lives than others and the deaths of many might be justified in order to protect their lives (it might be worth 5 people dying if it saved the life of a doctor that would later cure cancer). But in general 2 lives > 1 life, even if I have an emotional attachment to the one.

    Jc- http://dictionary.reference.com/browse/hypothetical

    It’s a thought experiment from which I draw logical conclusions. Not a realistic expression of how the world works.

  58. “Of course I do believe certain individuals may lead more valuable lives than others and the deaths of many might be justified in order to protect their lives…”

    Ah, yes… but aren’t values subjective? The lives of my family are much more valuable (to me, at least) than the lives of 10,000 strangers.

    I believe Peter Singer calls himself a utilitarian… now there’s a guy with some strange ideas.

  59. It’s a thought experiment

    That’s the most accurate thing you’ve said Shem. The vulgar among us (not me of course) also describe it as mental masturbation. You’re getting off on airing semi-random thoughts before you even know what you believe yourself. There’s no coherence at all.

  60. Shem: utilitarianism is bogus as all measures of utility are subjective to individual. Bascially, the ‘greatest good’ is unmeasurable. You can get rough measures of societal wealth from observation (eg, the number of skyscrapers in a city) but these are imperfect measures. If you use the more extended form of utilitarianism, ‘the greatest good for the greatest number’ you’re getting into egalitarian territory and that leads to flawed systems like socialism.

    It’s more important to understand the superiority of private property and voluntary trade from a logical perspective. The featured book above (Economics in One Lesson) is an excellent primer on economic logic and I highly recommend you read it if you haven’t already.

  61. Shem I beg to differ. Crony capitalism is not capitalism. The expression “crony capitalism” is itself an Orwellian inversion of logic and a form of doublespeak. You either have cronyism or you have capitalism. Sure there exists a space in between the two, but they are at opposite ends of the spectrum in terms of economic freedom.

    Crony communism, now theres a tautology.

    Pure capitalism does not allow special interests. If you think corporatism and special interests are an integral part, a necessary consequence and direct result of having and supporting free markets, then you need to check your premises.

    Capitalism = free trade where government grants privilege to nobody and only seeks to enforce contracts and uphold property rights.

    Cronyism *requires* government granting privilege to a party.

    Subsidies and regulatory favors do not exist in capitalism.

  62. “One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.”
    —Ayn Rand, 1975

    K Dudd is really starting to piss me off.

  63. The thing is, people are forced into discarding things because companies deliberately manufacture replaceable products.

    As usual with free markets, actual coercion and force is never involved.

    People can always choose to salvage or repair an item, they can choose to discard it. Repairing electronics is generally not worth the while, because they are mass manufactured so quickly and cheaply.

    I don’t think you or I are in a position to tell consumers and manufacturer what type of products should be sold via government dictat.

    If a typical mobile phone has a 12 month warranty and doesn’t last more than a few years, perhaps there is a reason.

    I don’t see how you can manufacture cars and phones that last longer, but the beauty of free markets is that you are free to put your money where your mouth is and try.

    Or to reward an entrepreneur who has tried by buying his products.

    If couches and mattresses only come with 10 year warranties, then perhaps that also isn’t enough for your preference. So don’t buy it and sleep on the floor.

  64. Yeah, right on, Shem!
    Imagine how good things would be if they lasted forever! That T-model Ford would be the only car ever used, if it was the first car your family bought! Even if you wanted to buy a replacement, what would you do with the old T-model? Who would want it for spare parts- since all car parts last forever, and therefore don’t need replacing?
    Planned obsolescence actually looks smart, if you bother to think about the alternative- undiscardable products.

  65. I imagine you could make a longer lasting phone, in which case we could all be lugging bricks. There’s no point making a long-lasting product in a fast developing tech area. But if it was worthwhile nokia would be doing it cause that is what their customers would want. Ever notice how couches, for instance, aren’t all made to fall apart. When they do finally wear out, they’ve depreciated to nothing.

    ED, Rudd is a long term thinker. Have you forgotten the 2020 summit already?

  66. a property anecdote –

    big auction last weekend in ultra-exclusive Whale Beach in Sydney’s Northern Beaches (classic weekender territory).

    a guy got a margin call and was forced to sell his Whale Beach mansion. he put it up for auction with the tag ‘offers invited over $4mm’. he got a $2.6mm offer and it sold.

    ski chalets will go first, then farms, then weekend retreats, then waterside properties, then units in boom towns like QLD and Perth, then anything in QLD and WA, then and last of all, inner-city dwellings.

    i’m not doom-mongering. just trying to save you money 🙂

  67. pom

    It’s an interesting quandary. Where do you put your money if governments are right at this moment creating another monetary expansion that dwarfs all the others.

    The US is literary printing the stuff 24/7. See Fed’s monetary base. Europe will be going to negative rates soon and everybody else is loosening up.

    Eventually, property, stocks etc. will come back in nominal terms terms simply because people will again go and buy inflation protection… and we go into the next boom……

  68. Ummmm Interesting, pom. Rogers is almost as smart as I am. LOL.

    tell the truth as of last Friday my objective is to eventually go 150-200% invested in stocks and hard assets. As silly as it may sound to some people this is the time to be buying with ones ears pinned back over a period of time. Not saying there won’t be any hiccups but the last thing I want at the “moment” (slightly longer term) is cash as they’re printing it in quantities we have never seen.

    where’s the problem?

    the governments are actually guaranteeing the world’s banking system which means that the interbank lending spread will come down pretty soon…. and we’re off to the races.

  69. People can always choose to salvage or repair an item,
    .
    Inbuilt obsolescence?
    .
    One example. Most mobile phones will drop dead after a certain period of time. Why? Because the transmitter fries the motherboard. There’s a solution. You insert a bit of plastic between them, absorbs the radiation. Panasonic do this: for company phones.
    .
    If you’ve got access to the tech-heads with the tools you can do it too. But it ain’t easy.

  70. So jc/pommy, are you saying the “case against property” is still strong or not? At #73, poms “not doom-mongering” warning suggested property was still on it’s way down, but if inflation is coming (and rates coming down), isn’t property better than cash?

    Doesn’t the cycle normally go: property, shares, cash? Or is this a simplistic/misleading view?

  71. Fleeced:

    I don’t disagree with pom. I just think I think property is already down
    His example of the Whale Beach sale is a good illustration. In the previous age, say prior to last Xmas 🙂 that same property would have fetched $4.6 million. The sale at $2.6 is essentially the new market in that area. Real estate as far I’m concerned is down.

    I think though at depressed prices you need to buy as a of store value as I think they’re embarking on the next big inflationary grind higher.

    Under the current system you essentially buy when everyone thinks stuff is dirt, like stocks at the moment or pitching low bids in the real estate market.

    There’s time I think, but it also not hard to envisage that some of the worst is over as banks are not allowed to fail and monetary monetary expansion is moving at a fast clip.

    I’m buying now, very carefully with a 3 to five year time frame. I’ll crank it up when I see credit spreads moving lower which i think they will in the not to distant future as the banking system has now been socialized and the interbank market will begin moving funds around.

    My hunch is that they will be very soft with rates from here on out as they’re afraid of what has happened and won’t move until they’re forced to by heavy inflation numbers.

  72. Dunno about that cycle you’re talking about, fleeced. There are also timing differences etc. US real estate is fucked for the moment because of over supply which is why i think stocks there are okish value. However there are better places to buy than the US. Selectively emerging markets with a US dollar peg. Aussie stocks look good. I bought a decent load of QBE last Friday hoping to buy more but it’s runaway today. There are some pretty decent bargains around. Look for firms that are buying their weaker competitors now as they are consolidating.

    BHP and RIO are dirt cheap, I think.

    But then who knows, it takes all types of thinking and I could be really wrong. The thing is that I have waited a while for this and this weekend’s nationalization of the global banking system more or less forced my hand a little.

Comments are closed.