A article on that subject written by me was published today on the Australian Misesian web site Brookes News. I could add here that while there are many similarities between the situation in Australia and the United States, with a housing bubble (The bubble is even greater in Australia) and huge current account deficit, one striking difference is that the Australian dollar has been very strong. There are probably two reasons for this. One is that Australia unlike the U.S. has a balanced budget and thus enjoys more confidence in the world markets and second that Australia as mentioned in the article greatly benefits from the rising commodity prices.
Source link: http://archive.mises.org/2763/australias-inflationary-boom/
Australia’s inflationary boom
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I used to work for a Coalition MP. You may recall that the Productivity Commission was tasked to produce a report on House Prices. I wrote a submission for my MP which argued, amongst other things, that housing was being used as a substitute for share investment. Indeed the House Price Index and the All Ordinaries Index tend to behave inversely.
However another big ingredient – left out because it would have been impolitic of my employer to say it – is the negative gearing loophole. For American readers I should explain that in Australia, one may may claim interest payments on property when preparing a tax return. This means that early on some very wealthy folk shrunk their taxable income by buying heavily into property at a high level of gearing. The fad caught on as a magical get-rich scheme. Given that money is now quite cheap here (though a few % above US rates), all sorts of people have heavily geared themselves. It’s a pyramid scheme which at some point is going to ruin a lot of lives.
Jacques, US taxpayers may deduct mortgage interest payments on a primary residence from income for tax calculation purposes.
I take it that “gear” is an Australian term for “leverage”. I note that gear is also slang for heroin (as used in the Scottish film Sweet Sixteen).
Mike, in Australia, interest payments can be deducted for any residential property, not just the primary residence. However only the primary residence is exempt from capital gains tax when sold.
Gearing is used in the sense that leverage is in the US, to represent an amplification of one’s position using debt. Specifically the get-rich schemes are called “negative gearing”, negative because the goal is not to make money from rent, but rather for rent plus income to be required to pay the interest payments. As you can imagine, the scheme hinges on rising house prices, steady interest rates and steady employment.
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