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[00:00:01] Since 1999, house prices have risen by over 400%, more than twice as vast as average incomes. Young Australians turn up to an auction and they get outbid. Our reforms to negative Gary and capital gains tax remove these distortions. They're bringing more first home buyers back into the market. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie.
[00:00:32] Well, it's not been enormously popular with lots of people in Australia who have their own homes. And in the first week or two, it does seem to have brought house prices down in Australia. But you can't make houses more affordable without making them cheaper. So has Labour got the right idea? Is this a good first step in a country where housing accounts for a bigger proportion of wealth than anywhere else in the world? That's this week on the Debunking Economics podcast.
[00:01:04] Well, we have had a couple of weeks break just in case you didn't notice. We thought you might be getting sick of us. So we were doing it for you more than anything. But we are back now, Steve. I'm now firmly ensconced in Australia for the rest of my life. And you are in... Well, where are you now? You're in Thailand currently. In Thailand for the rest of the week. Yeah, yeah, yeah. Not quite the same commitment. Yeah, you're rather more stable than I am. That's true. For now. Absolutely. Yeah, yeah.
[00:01:31] So look, here in Australia on the 14th of May, the government handed down a budget. Now, normally when governments issue budgets, no one really pays too much attention. There's just a bit of tinkering at the edges. And maybe this is tinkering at the edges as well. But it has caused a storm of controversy because the Labour government here has reversed two rules which have helped property investors. So currently... Property speculators, yeah. Well, speculators. Yeah, exactly.
[00:02:00] So currently, if you are... Let's ignore you investing in your own property, your own home. But if you are investing in property that you want to rent out, in the past, you have been able to negatively gear it. So all the costs associated with the loss that you made in your house, in your investment property, get written off against tax. So the obvious thing... And that's a point worth elaborating for non-Australian readers. Yeah.
[00:02:29] Landlords in Australia try to lose money. Exactly. The reason they try to lose money is they get a tax break out of it and then their capital gains, which they, in the past, did not pay tax on at all. So ironically, rents are high in Australia, but they're less than the servicing cost of the debt that landlords have taken on to buy those properties deliberately because that's the way they get a tax break. Yeah. And they'll bar... And presumably, it's going to push up property values as well because you'll be there going... Oh, no, no, no, no. Because you're going to say... Totally unintended consequence.
[00:02:58] I don't care how much this property costs just so long as I make a loss because the loss I make on it. So I'll get a very high mortgage, maybe an interest-only mortgage, so that I am... So I'm making a loss. I'm charging, you know, less in rent than I'm paying in the mortgage. All of that gets written off against my tax. So if I earn $100,000 a year from my day job and I lose $30,000, then rather than paying tax on $100,000, I'll only pay tax on $70,000. That's the way it's worked historically.
[00:03:28] And why stop with one? If that's working for you, why not get two or three investment properties? If you can lose $30,000 on each one, then you're getting down to the stage where you're basically not paying any tax whatsoever. So it's a dream. Living the dream. Well, it's a dream for those that are doing it. It's a nightmare for those that are on the receiving end of it, which is people who are currently renting or people who are facing the prospect of their first property, and it's beyond their capacity to save the amount of money necessary because of the highest house prices.
[00:03:58] Well, so presumably it doesn't push rents up because you want to make a loss on the rent. The reason is why would you be doing this as an investor? It's obviously because you're not making any money. You've got less money to take home at the end of the day because you're making a loss on these properties. But if you can afford to do that, you live frugally, but you are paying very little tax. But you're doing it because you think at the end of all of this, I'm going to get a very nice capital gain on this property.
[00:04:27] And you still don't pay capital gains tax, or you used not to pay capital gains on the gains. So what's the new change? No, no, you did pay capital gains. That's the thing. So if it's your own property, you didn't pay capital gains. But if it was an investment property, you did pay capital gains, but it was discounted by 50%. That's for half the rate of income tax. So it's encouraging people to speculate rather than work. Yes, exactly.
[00:04:52] So now the government is saying you're not going to get that 50% discount. So you're going to pay the full capital gains tax, which in Australia is quite high. So it's like a marginal tax. So what is it? 45%. So you'd pay... Which is the same as the top marginal income tax, right? Yeah, yeah. Which is, in effect, what you'd be paying. And so it should be really, actually. Yes, absolutely. I mean, isn't it... What we've had...
[00:05:19] Australia is probably, in terms of behaviour, the worst of the Anglo-Saxon countries in encouraging people to gamble on rising asset prices by taking out debt and making a leave at debt. Yeah. And that is classically what's going on there. And of course, if you're taxing capital gains at half the rate of income, you're telling people, you know, don't make a profit, don't earn a wage, you know, relatively speaking, buy properties and watch the price go up. So it's encouraging price bubbles.
[00:05:47] And that's, I think, led to a complete conundrum for the Australian economy because the main form of stimulus for the economy has been people borrowing money to buy houses. And at some point, it becomes beyond the capacity of young people, by young, I mean below 40, approaching below 50 now, to actually buy their first home. So I did some numbers on this just out of, you know, just out of interest. This is all hypothetical. But say you earn $10,000 a month in Australia from your day job, and then you've got $3,000
[00:06:16] a month on rental income, but your mortgage is $6,000. So you're making... So it's $13,000 income, but you've got $6,000 in costs. So you'll only pay tax on $7,000 rather than $10,000. But then what happens if you get another property? So you get another $3,000, for example. So actually your cost then is $16,000. So your mortgage is $12,000 a month. You've got $16,000 income minus $12,000 costs.
[00:06:42] So you're actually paying tax then, if you can afford to live on this amount, you're paying tax on just $4,000 a month. But I mean, can you afford to live on such a small amount? Well, the answer is yes, you can if you've inherited a great deal of money from your parents doing exactly the same thing. And so it's quite a useful way of shifting around. If you've got a lump of money that's already had tax paid on it or it hasn't been subject to tax, then you can live off that and you can use your money to minimize your tax by buying properties.
[00:07:12] It's very, very easy to do. And loads of people are doing that. So it's, you know, the money getting passed on from one generation to the next is fueling this whole thing. It is. And it's a class divide now, a class divide initially established by age because baby of them, as my generation and slightly older, were able to buy at incredibly low prices, higher interest rates at some periods, which they often complain about, but generally the same interest rates are applying right now.
[00:07:41] Far lower prices, the property increases in value, they get a capital gain and they join the landlord class, not just the capitalist class, it's the landlord class. And you're rewarding unearned income. So baby boomers have done very nicely out of this and now they want to continue making nicely out of it. But the only way this thing works is if the person who buys a property off you borrows more money than you did to buy it. So it requires an accelerating level of mortgage debt.
[00:08:08] And it's, it also requires a cohort of potential buyers big enough to soak up the required number of purchases. And as you, because the age at which people can now become a first home owner is rising and rising and riding, it means you're getting to the point where less than half the population can't afford, or more than half the population can't afford to get into the game on the first instance. So you no longer got the buyers.
[00:08:33] And I think that's, I think we're reaching the pinnacle of this because it's all driven by rising household debt. And once household debt stops rising, then you're reaching a barrier. And we're at that point, I think now. Well, look, if I had, if I'd been paying 6,000 a month for the last 25 years, that means 25 years ago I would have bought a house that would be worth about 770,000. And that property today in Sydney would be worth 3.5 million.
[00:09:02] So that's a capital gain of 2.7 million per house. And I'd probably do that, probably do that multiple times. So you can see easily how wealth is, is being generated. But you would then when you die, that money gets passed on. Actually, you don't almost need to even don't need to worry about this halving of the capital gains tax because if you die with those properties, it gets passed on to your kids. And there's no capital gains on that until they sell those properties.
[00:09:33] So they may decide, well, we're just going to live in them. So we've got, we've got no expense. So we can live quite frugally. What will we do with all this money we've got coming in? I know what we'll do. We'll buy a few investment properties. Yeah. And so you get a lot, you get a landlord class being developed. And the ironic thing is the objective of government policy was to increase home ownership and the effect of government policy. And this is where I'm going to sound a bit Austrian. The opposite. It's reduced home ownership. Yeah.
[00:10:01] It's a document that's only done at the time of whenever census is done. And that's every five years. But there was a study at the census showing the percentage of people who owned their homes outright, who owned their homes with a mortgage and who were renting and who were renting in the public market. Now, what you've had is the number of who are owned outright has fallen quite dramatically, about half from, say, 40 percent to 20 percent. The percentage that is owned with a mortgage has increased from 20 percent to 40 percent. And the proportion of people who are renting in public has declined.
[00:10:31] People of private renting has risen. So it's increased insecurity of housing. That's been the effect of these government policies. But it made the baby Burma generation and the property developers quite wealthy. So, of course, we're sticking with it, even though it's socially destructive. Well, yeah. I mean, the fact that we've got rid of this. Well, I mean, it's still being voted on, but it's in the budget. So if the budget passes, I think it's been through one house so far. So if it does get through and obviously the opposition, which have got lots of houses, are very concerned about it.
[00:11:02] But if it does get through, then this will become law. So that 50 percent discount on capital gains will disappear. And everyone's making the big thing out of it. But it's not much, is it really? So if you think, well, OK, that 50 percent capital gains. So that so if I had what, 2.7 million that I made on that house from 25 years ago, I might only make 1.4 million on it. It's still a slug of money, isn't it?
[00:11:33] And would it stop you making that investment? Probably not. Possibly it would, because the whole reason for doing the negative gearing and losing money on the property is to be able to reduce your income tax. And when you then have a sale, pay a lower rate of tax on the capital gain. Now, if you pay the same rate of tax on the capital gain, all you've done is shift your obligations through time. You haven't reduced the scale of those obligations.
[00:11:58] So I think it's going to encourage, I mean, there's less encouragement for people to buy existing properties. I think it only relates to existing properties, doesn't it? It does. So that was actually the, yeah, the two, the two, I think the two rationales behind this are one is, is to try and make more people buy rather than rent. Yeah. So in other words, yes, get rid of a bit of this, this real estate class, this rentier class.
[00:12:25] And then the other side of it is just that is to say, well, OK, this abolishing or getting with the capital gains only applies on established dwellings. So if you're buying a new, it's also grandfathered, by the way, of course. Yeah. So, you know, if you're in this situation now, don't worry, don't you worry about it. You know, this is just for the kids. Nothing to do with, nothing to do with the baby boomers. Yeah. You're all like, oh, OK, please vote for us.
[00:12:48] But if you are, yeah, otherwise it's yes, the, you will still pay, you'll, you'll still get that capital gains discount if you buy an investment property. So a brand new investment property. Yeah. So it's new properties, not established properties. That's why I encourage the supply side of things. It's the usual argument that it's all about supply and demand. So if we increase supply, prices will stabilize. But I remember seeing one of the Labor Party politicians being asked about this and saying, our objective is not to have house prices fall.
[00:13:19] Our objective is to have sustainable house price growth. And so this is, this is to show how different this is to commodities. There's no commodity which they say, oh, we want to have sustainable price growth and carrots and tomatoes and television sets. No, you can't. Because that's inflation. That's inflation. You don't want that. We want inflation and asset prices. Yeah. And that's, this I think is where the conundrum comes from that we have a whole bunch of governments around the world who are in, to Australia being the most extreme, encouraging
[00:13:48] people to speculate on rising asset prices. And then rising asset prices become the objective of government policy. And that becomes a completely distorted picture. You don't, you don't create more goods and services by having more expensive assets. And that's the trouble. So is this a smart move? No. Well, this, this is a smart move. I'm, I'm, I'm approved. This is one of the few government policy changes that I approve of. Unlike, for example, the other one that they did in housing just last year, where they
[00:14:18] reduced the deposit people need to 5%, allowing a 20 to one gearing. That's outrageous. And they also covered the lenders insurance. It's called mortgage. Mortgage insurance is actually insuring the lender, not insuring the borrower. Yeah. So they said, well, the government will pay that as well. All that is designed to inflate asset prices and to drag people into huge amounts of personal secure debt, again, with their mortgage. I think that's horrific. Yeah. This one at least is a bit of a reversal.
[00:14:47] And so I'm not exactly happy with the Labor government, Australia, but I'm less unhappy than I was last year. Yeah. Well, I mean that 95% mortgage thing is a crazy situation. You're right about that, that mortgage insurance. So basically, if you took out a loan where you had equity of less than 80% or more. Sorry, got it the wrong aground, haven't I? Yeah. If you've taken out a loan. 80% or more later, yeah. Yeah, exactly. Yeah. In other words, the equity is 20%. Yeah.
[00:15:16] Then if it's less than 20%, then the bank will take out mortgage insurance for them to be covered, but you paid for it. That's right. So even though- No, the government pays it. They say, yeah, take that bank loan. Yeah. Go right ahead. Yeah. That's what totally irritates me about it. And actually, it's quite intriguing when you take a look at the pattern of data over time.
[00:15:41] Because if you go back to 1970s, the level of mortgage debt was under 40% of GDP, our level of household debt under 40% of GDP. It rose to 120% by the peak of the global financial crisis. Actually, it went even beyond that with the government encouraging yet more speculation. So Australia's household debt level peaked at 120% of GDP, 125% actually.
[00:16:11] And now it's starting to fall. But the government is still encouraging it to accelerate. This is one of the weird things about price dynamics for housing and shares. It's actually the acceleration of debt that drives the prices. And Australia can encourage the acceleration to maintain normally being positive, which can happen even when the level of mortgage debt itself is falling. Right.
[00:16:38] Let's pick up on that because Australia is an outlier in so many ways. And I want to try and get to the bottom of why that is. It's not just house prices which are crazy and the level of debt for those house prices. It seems to apply across the board in so many ways in Australia. So let's do a bit of a comparison when we come back on the Debunking Economics podcast. This is the Debunking Economics podcast with Steve Keane and Phil Dobby.
[00:17:11] So Steve, I'm looking at some numbers here of the price to income ratio, price of houses to the income ratio. So for Australia, it's eight to nine times the price of a house. I should say a house is eight to nine times the average income. In the US, it's four. Yeah, that's right. Australia is that much. And the UK is similar. Well, the UK is six or seven outside London. London is crazy. Yeah. London is worse than Australia.
[00:17:41] But that's because of a lot of foreign money flowing into London, which the government doesn't seem to have any interest in stopping. But regional UK, it's about six. The US is four. Here in Australia, it's eight or nine. Yeah. And when you talk to builders and there's a guy who used to run a, I don't know if he still does a bit, it is an annual survey of house prices called Demographia. He was an ex-property developer in New Zealand.
[00:18:05] And as a socially minded New Zealander, he said the real, the price to income ratio for housing should be 3.5 to 1. He said when it's 3.5 to 1, people can afford it. And you're paying mainly for the construction cost of the house. When it gets to be 9, people can't afford it. And you're paying mainly for the cost of the land, which has been driven up by the level of lending. So a realistic price should be 3.5 and we're at 9. Australia's at 9. Which we've covered off so many times on this podcast. So it's all driven by demand.
[00:18:36] And that demand is being driven by the availability of money. Yeah. And yet why would there be so much more money available in Australia to invest in housing than there is in all these other places? Because the government has been encouraging the speculation with the first-time owners grant, which I call the first-time vendors grant. Capital gains tax cuts, as we all know.
[00:18:59] When they brought in VAT, they gave extra grants to first-time buyers, which were supposed to last six months. So they lasted 18 years. The government has used its money creation capability in that sense to encourage a Ponzi scheme in housing. And this has been a common event across the Anglo-Saxon nations. But Australia is probably the worst.
[00:19:21] And so we are encouraging banks to lend for asset price inflation rather than lend for productive investments. Whereas, obviously, I mean, China's had its own boom and bust. And partly what Xi has been doing is getting rid of some of the mess left by the property bubble that the Chinese government started in 2008 when the global financial crisis slashed China's exports.
[00:19:47] But generally speaking, countries in the West have encouraged this. And it means you don't get productive investment. Whereas the Chinese approach is to get as much investment in infrastructure from the state level and innovative technologies at the private level. And that's where the money should go. And you consequently get a much higher level of home ownership in China, like 90% ownership apparently, versus Australia in terms of unencumbered ownership. It's probably about 10% or 20%.
[00:20:17] So it's horrific how badly. It's impressive how much it's driven out of prices and how it's tragic and how much it's created economies that are hollowed out and only really have, in Australia's case, mineral exports and rising house prices. It's houses and holes, as macro business calls it. But what I don't understand is we've got all this money going into property in Australia more than in the UK or the United States.
[00:20:45] The US people are putting that money into equities. They're buying shares with it. So consequently, the share prices to income ratio is much higher in all the level of shares held is much higher in the United States than it is in Australia. But that's only because of the direct investments. Australia's super fund is also very high.
[00:21:05] So the near retirement median super balance, the pension balance for those people who are wondering what I'm talking about outside Australia, so private pensions, is around 500,000 Australian dollars per household. Okay, that doesn't sound like enough to get you through the retirement if there's just a couple of you. But in the US, it's half that. And in the UK, it's more like 90,000 rather than 500,000.
[00:21:33] So Australia is leading the world, and there might be some, I'm sure there are places where it's higher. But in terms of developed nations, in terms of the amount of money that's put into super funds. So I'm trying to put all this together and thinking, because you'd be thinking, well, okay, if people are investing, that was my first reaction when the government did this. And I was thinking, okay, people only invest less in property. They'll just put more into their super. But we're already leading the way in super. So how are we able to do this?
[00:21:58] We've got high house prices, lots of housing investment, and we've got lots of pension investment as well. How is Australia managing to do all of this compared to all these other countries? Well, partly what they did, this goes back to the days of the Labour Party Accord in the 80s. And it was originally intended to bring, and I was part of drafting the ideas behind that. The idea was to try to get some of the Swedish social democratic approach to industrial management.
[00:22:27] You get workers and management to cooperate with each other. And the Accord, literally the idea of the Accord was to have common agreement about what the overall policies are for the country. Instead, when it came in, you had the high inflation period. And what the Labour Party did was to say, rather than getting wage rises, we're going to increase the percentage of your salary that goes into superannuation, which means you get money taken out of your current salary. You would have got a pay rise. You don't get the pay rise, but you increase the amount you get in your superannuation.
[00:22:57] And then that's what led to the increasing amount of superannuation. And then at the same time, what do the superannuation funds do? They, rather than building real businesses, they speculate on the stock market and housing markets, mainly stock markets. So you get a house, you get a stock price bubble out of it. And again, it's a financialized economy. It's not a production economy. It's financialized. Yeah. Well, actually, in fairness to the Australian super industry, it's getting close to the point where more than 50% is going overseas.
[00:23:27] And quite a lot of that is private investment, actually, into infrastructure projects and the like. So that's a more worthwhile cause. Developing the rest of the world rather than developing Australia. I know. Yeah. That's great. And you can completely rely upon the rest of the world maintaining the supply of all the things we need indefinitely. So long as you don't look at the Middle East, American policy and global warming, it's all going to be fine. Yeah. More mediocrity, more mediocrity leading the way. Yeah. So, okay.
[00:23:55] But here's what I'm finding perplexing, right? So we've got all this money that's gone into housing. We've got all this money that's gone into super, so much so that we can't find things to invest in locally. So we have to look overseas because there's too much being invested in super for local investments.
[00:24:13] How come we've still got all this money left over after all of these investments to still go and eat in restaurants and go shopping and stuff like that, which all the other comparable OECD countries do? How are we managing to get this balance? Well, it's not a balance. Okay. Well, how are we managing to do it all then? Okay. Well, the high house prices is high household debt. Yeah. That's the driving. That's a common factor for the rest of the world.
[00:24:41] It's just that Australia's managed to maintain positive acceleration for longer than most of the country's done. We're worth showing some graphics for those who are watching on YouTube. Yeah, yeah, absolutely. Yeah. We'll have to talk it through, of course. Okay. But I mean, that's your answer to that question while that's coming up. Yeah. It's just we carry more debt than anywhere else. We carry more debt. But we're not concerned about it. But normally you go, well, if we're carrying that debt, that's going to impact on how much we spend day to day. But clearly it's not because we are getting a healthy turn on that debt.
[00:25:08] So this is the level of, that's the house price index. It's set at $119.70. It's now 6,000, so 60 times increase in house prices. This is for Australia. Okay. This is for Australia. And then the debt level, which is shown over this side, debt's gone from about 30, and this is in terms of household debt only, from about 30% of GDP to 120%, rising all the way up to the global financial crisis with a bit of a drop then.
[00:25:35] Then the first time vendors boost comes in and encourage people back into household borrowing again. That's why Australia didn't have a recession. And now it's reached a peak and it's coming down, and courage to rise yet again by policy after COVID. But that's the overall volume. Now, I'll just go back and take a look at America's because people look at that and say, well, there hasn't been a house price crash. The Keene's wrong because there hasn't been a house price crash. I've heard that so many times. This is looking at America. Well, they're right. There hasn't been.
[00:26:04] There hasn't been. But the reason why, here's the Australian data. I'll just actually put that in presentation mode so I get some of the graphics out of the way initially. But if you take a look at American household, house prices, which are the red line and household debt, which is the black line. First of all, American household debt peaked at under 100% of GDP versus more than 120% for Australia. You get generally rising household prices and rising debt.
[00:26:32] But there are periods here where you've got falling level of debt as a percentage of GDP and rising house prices. So that's the part you can't just explain by saying it's the house price dynamic. But if you take a look at the fact that I say that drives the whole thing is change in the change in mortgage debt. Because the monetary demand for housing is fundamentally new mortgage debt.
[00:26:59] So the change in mortgage debt is what sets the level of house prices now. Therefore, the change in the change in debt is what causes change in house prices. And when you do that analysis with that same data for America I showed a while ago, you get this almost handmade glove type fit of two data series. Acceleration of mortgage debt and change in house prices. Lockstep together on the correlation coefficient is quite high, 6.63.
[00:27:26] But remember that's .6, say roughly .64 if you round it. That's the correlation for America. Now nobody denies that America had a house price bubble and burst. Everybody says, oh, Australia didn't. Well, why did Australia not? Here's the Australian data. And you see the same, that's the high level of household debt, high level of house prices as well. But when you do that acceleration in house debt versus change in house prices, you get a higher correlation.
[00:27:54] So the reason Australian house prices fell is not that they're different to the rest of the world. They've got the same causal mechanism that accelerating mortgage debt causes rising house prices. What has happened is Australia's government by policy changes like capital gains, car tax cuts, negative gearing, first home owners boosts, yada, yada, yada. All those things have maintained positive acceleration of mortgage debt.
[00:28:19] But now you got to the point where it's not quite flatlining, but the potential to continue accelerating mortgage debt I think is over. So I think that in some ways what the government's doing now is shutting, they say shutting the gate after the horse has already bolted. But that's the same dynamic is actually stronger in Australian data that what causes rising house prices is accelerating mortgage debt.
[00:28:46] So, I mean, they need to do more though, don't they? Well, I think that's a big deal. But of course, because that's a huge deal. If it is just government policy, that's because what you're basically saying is people can borrow more. And so they are. And so that's pushing house prices up. And government policy has been helping that. That's a hell of a difference though.
[00:29:09] If that is all government policy, that's the reason why the price to income ratio is eight or nine times in Australia and it's only four times in America. That's a hell of a difference if that's just being driven by government policy, isn't it? It is. And it's destructive government policy and it's why it should go. But the trouble is so many people have made money out of it, the baby boomers, they've been voting for this sort of stuff. Well, to go from eight times to four, you've got to halve house prices. That's right.
[00:29:34] And like that would bankrupt most people, which is why I came up with the idea of a modern debt jubilee as a way of reducing house prices without reducing the equity that homeowners have by using government money creation capability not to maintain a housing bubble, which is what Australia has been doing. It costs the, you know, the government has to create money to give a first-time vendors burst.
[00:29:56] The government has to create money to enable somebody to pay the insurance for somebody, the mortgage insurance for the house so they can have a higher level of leverage than, you know, rather than a five-to-one ratio, they can go to a 20-to-one ratio. All this stuff is using government money creation capability for destructive purposes. Now, Australia isn't quite as destructive as America.
[00:30:18] We're not bombing the shit out of other countries with the government money creation capability, but we're bombing the future for the young people by making it impossible for them to buy houses to maintain this bubble. And I think that's got to break at some point. Yeah. Except for, you know, except for those people whose mum and dad have made that investment. So the share of household wealth that's in housing in Australia is 56%. It's 36% in the UK. It's 27% in the US.
[00:30:47] So it's not productive investment. No, it's not. But you could say, but it's money that's getting carried on and passed on to the next generation, intergenerational wealth. Some people might say, well, that's fair enough. And it's intergenerational wealth for the wealthy. Yeah. It's not for the country as a whole. And this is the trouble.
[00:31:07] And I think, I mean, when I looked at this back in the 2000s when I was focusing upon the bubble leading to the global financial crisis, I realized that you have a whole bunch of people, you know, starting in my generation, who rode the bubble of rising house prices. I didn't question as to why I thought they were geniuses by buying a property on a rising market and making money. But it means the whole focus is upon the price of the house.
[00:31:36] It's not the invention I've just made that I can now sell commercially and make an income stream out of. And that's what Australia needs. It means it needs to be. We've got you've got to. Australia has a huge focus upon mineral exports, obviously. But it's killed its own manufacturing sector on multiple occasions. And part of why you end up killing it is the sheer cost of housing itself and the fact that people are putting their money into housing rather than investment. It's counterproductive. It's counterproductive. And I think it stays a number.
[00:32:08] But is actually the real issue that people are, and I think I made this point in the last podcast, people are overinvesting in housing and they don't care about the value of the housing so long as the value of the housing stays expensive because all they're using it for is a vehicle to pass money on to the kids. And so the investment property was great. The family home was good, too. And the family home, there's absolutely no capital gains. In fact, you know what?
[00:32:38] I don't even think if you die and you pass on your investment property, the capital gains only paid on that when the kids sell that property. I think that's correct. So there's not even, you know, whereas the United States, the UK, so many other places, there's an inheritance tax, which Australians are very opposed to because it's like, oh, you're taxing me on dying.
[00:33:04] But I mean, the absence of the inheritance tax is allowing this intergenerational wealth, which provides this incentive to overinvest in property and to make sure you've got a healthy super fund. You don't need that money. In fact, I think the amount of money which is, I mean, it's been shown statistically that people are overinvesting in super more money than they will need because they're assuming that this money is going to get passed on to the kids after they die.
[00:33:29] Similarly with property. So it's a way of passing on money to the kids without it being taxed. So do you have to say, well, OK, that's not working for us. That's overinflating. And we need to stop that. We need to put a stop to that passage of money. Which won't happen because people who are benefiting out of the ones passing the laws. I think the average number of homes owned by parliamentarians is about four from what I understand in Australia.
[00:33:57] So, you know, it's not only that they're doing passing laws which are not in the interest of the mass of the people. They're passing laws that are in their own interests. And this is one of the many reasons that, you know, our political system corrupts our economic system, which is corrupt enough to begin with. But is the is the upshot of this? Could it also be that so people just don't borrow the money to invest in property? So so there's less money being borrowed by the banks.
[00:34:25] So banks, oh, dear, they don't make quite as much money. I mean, I've got an interest in banks making money, obviously. But they're not they're not giving out as much in terms of loans as a result, because people are borrowing less because they're not investing as much. And is that actually a healthy outcome? We want to borrow, but we want to borrow to invest in useful stuff, don't we?
[00:34:47] We do. And that would mean investing in manufacturing concepts, technological development, all the stuff Australia's neglected, despite the fact that it's had a brilliant past in terms of those innovations. That's we just Australia, because it's such a small population and so remote and such huge distances between cities, there's always been an argument. And Australia can't have a substantial manufacturing sector.
[00:35:14] But like Sydney, Sydney, Sydney, Melbourne, four million people each. Five million. OK, five million. They're the size of some countries. And that means in some countries, like, for example, Singapore or Switzerland. And you get incredible technological development coming out of those countries because it comes down to innovative ideas by individual entrepreneurs. So my favourite example on that front was the first genuine laptop computer was invented in, wait for it, Gosford.
[00:35:44] Now, anybody who doesn't know Gosford, you're three levels down the pecking order of Australian cities to hit Gosford. It's mainly a retirement village and unemployed welfare queens, so I'm told. It's a beautiful town. It also has Spike Milligan's grave in it, which is extremely important. That's Woi Woi. Actually, Woi Woi. Woi Woi, near enough. You know, Woi Woi Gosford. Which he described as the world's biggest above-ground cemetery. But what they had in that city...
[00:36:13] Which is also gone as gravestone, I told you I was ill. I know, that's fabulous, fabulous saying. I told you I was ill. But yeah, what in Gosford, this firm called Dolmont, made the world's first portable computer. It weighed four kilos. It was battery-operated, and it had non-volatile memory to store the data in, and it had click-in modules for programs like Word and Excel, and they had very nice versions of it.
[00:36:42] They could never get the funding to properly finish the development in it because Australians don't make computers. Now, if the finance sector had actually provided working capital or investment capital for this firm, Australia would be the world's leading producer of laptop computers instead of folded. So there's so many examples I've seen where the finance sector in Australia has not supported the development of industrial capabilities of Australia instead of going for the financial financialization.
[00:37:10] And the government is supporting that with crazy policies like negative gearing and first-time owners' grants and so on. And that's just a counterproductive, speculative use of finance. And that's one reason why prices are so out of whack. Yeah. And obviously, the housing has obviously given people the ability to reduce their tax, which is the tax today, which is obviously what everyone is out to try and do. How do I minimize tax through whatever scheme the government's going to allow me to use to do that? Yeah.
[00:37:39] Interestingly, in your post-tax dollars in the UK, and we talked about this, about how there's ISAs. So it's like a savings account in the UK, and you can put in, I think it's £20,000 a year, and you don't pay capital gains on the income that that generates. And you didn't like that idea because it's favored the rich. It was a... Yeah. All this stuff favors the wealthy.
[00:38:07] But at least with that, if you have got that money, then you are investing it. And the UK government has now said, well, actually, we're going to make it £25,000 rather than £20,000. But £5,000 of it has to go in investments locally. Now, of course, you just put it in the local share market. But, you know, that's... At least you're boosting UK shares rather than US shares by doing that. But if you used a similar sort of scheme and said, actually, £5,000 of it's going to go in IPOs, for example. Yeah. Yeah.
[00:38:34] But right now, there's no other vehicle in Australia, from what I can tell, having moved
[00:39:03] the problems about government. Government can't do that sort of investing normally. I mean, infrastructure is what it can handle. But we could give people money they have to use on IPOs. It creates government money and say, you've got to use this to buy, to invest in entrepreneurial activities. Try to build an entrepreneurial culture in Australia. But instead, we've got a speculative culture. And so the shift is going to be enormous and very difficult. Yeah. Well, we don't even need to say you have to borrow it or whatever.
[00:39:33] We just need to say, however we've got the money, whether you've borrowed it or whether you've just got it from the sale of a house from your parents, you can put this amount of money in per year and the capital gain that you make on it, you don't pay anything for that. It's all yours, provided, and one of those provisors could be that that money has all been invested in local IPOs. Yeah. And then all of a sudden people go, okay, I'm not going to invest in the house. I'm going to invest in this new startup.
[00:40:01] Now, you're still taking the risk of the IPOs might fail. You might choose the ones that don't succeed. Sure. But you at least, the fund, the money that you've created is used to enable innovations to occur and new companies to be formed. And that's, you know, what is, Australia is desperately isolated from manufacturing. And this is what needs to be reversed. That's the most important policy change to make.
[00:40:28] And this budget nibbles at the edge of that by making it less attractive to speculate on the price of non-financial assets. But nibbles the word. So do you think an inheritance tax in Australia would help the situation as well? Well, inheritance tax takes money out of circulation. Let's go back to the MMT understanding there. It's not a way of raising money. It's a way of taking money out of circulation. And it redistributes from those who've made money to those that have not been able to get into the system.
[00:40:58] So it's mainly the redistribution effect that you'd be looking at. Whether it would work or not. I mean, the wealthy... That's the point. I hadn't thought about that. It is in effect reducing the money supply. Yeah. Which would be counter to growth. Yeah. You want to create... You want to reduce the level of income concentration or wealth concentration. That's the main thing you do by using those policies. And certainly, like an inheritance tax would be a way of partially reducing that accumulation
[00:41:28] of wealth in the hands of the extremely wealthy. But, you know... You have a way of an inheritance tax with provisos then, couldn't you? You could say, well, okay, property is going to be subject to an inheritance tax. If we had this scheme where you're investing in local businesses, that is inheritance tax-free. I mean, you know... That's feasible. Yeah. You start to encourage on innovation rather than speculation. That's what's necessary. Yeah.
[00:41:58] But I think... What we're saying, the intriguing thing is what's happening in the polls. And it looks like, as you'd know, Australia is likely to vote for somebody like Pauline Hanson at the Labour Party. And it's showing that the neoliberal bandwagon that all these parties jumped onto 40 years ago in the belief that that would make them permanent control of the political system has failed. People are very unhappy with the state of neoliberalism. So unhappy they'll vote for somebody like Pauline Hanson or Donald Trump.
[00:42:27] And so the whole reason we went to these policies in the first place was the belief they'd succeed in making the economy grow faster. Instead, what they succeeded in was financialising the economy, meaning economic growth has been slower since the neoliberal period began than what it was beforehand. But Pauline Hanson is not going to do anything different. I mean, she'll... Of course not. Of course not. Nor is Donald Trump. Not going to do what they promised to do either.
[00:42:53] But that shows a level of dissatisfaction with the neoliberal style policies that have been tried by both conservative so-called parties and progressive globally. Democrats and Republicans, as your old mate George says, two chicks of the same boom. Same thing, Labor versus Liberal in Australia. The two to the same boom. Tories, Tories. So all of a sudden, the parties that went the neoliberal route are about to be wiped out in the electorate. And that shows... But this move by the Labor Party has been enormously unpopular though, of course, because
[00:43:22] people are thinking that they're worse off as a result of it. Yeah. But it would be popular with the younger voters. Yeah. Once they've seen the souls being screwed by this. So... But the intriguing outcome of neoliberalism is all the parties that thought that would benefit from it are about to lose office. Yeah. Yeah, yeah. Well, except the very young from wealthy parents might not be so happy because mum and dad might not have quite so much money to pass down to them. Yeah. So it's... My heart bleeds. So it's only the young and the poor.
[00:43:52] And it's, you know, so you're looking at a smaller subsection of society. So I don't know whether that's a big enough group. But anyway, something's got to happen, hasn't it? Uh... And it seems like more selective government policy. But you're right. Uh... It's... It's not speculation. Uh... It should be innovation. Yeah. And government policy could do all of that if they were smart. Yeah. And they're not. Australia's a lucky country, which is a country that relies... Led by mediocre people who rely upon its luck. And that would summarize...
[00:44:22] Steady on. Glorious people. What lucky country actually means. Yeah, that's right. That's the original meaning of it. Let's say that it's being with large right now. Yeah, yeah, you were quoting. Exactly. Yeah. All right. Very good. Well, maybe there'll be change. We'll talk Steve soon. Talk to you next week. See you. Bye. The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics, even if you haven't, you might
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