Can property outpace incomes forever? And what Stage 3 Tax Cuts mean for you

Posted by Gavin Chau

Stage 3 Tax cuts started yesterday. It’s nice to get something back from the government occasionally. The government sure as hell doesn’t know the best way to spend our money. Its favourite trick is using our money for needless expansion of government departments.

What implications does it have for the property market? Not much really, it boosts borrowing capacities a little, but for people who already own investment property, it means that you will get a bit more of your tax return upfront instead of at the end of the year. It also means that instead of being 20% poorer after COVID-19 (due to inflation), we’re probably about 18% poorer, but a wins a win!

Below is a table of what we will likely be getting back.

For more detailed answers, find a calculator at this link.

Ok, onto other things.

One question that seems to keep popping up is how property prices keep rising faster than incomes. I can understand the question since it took me years to come up with a satisfactory answer.

Interestingly, when you read news articles about this, it becomes painfully apparent that nobody understands what is happening, but that doesn’t stop them from pretending they do. This includes people with PhDs in economics and well-known finance and investment personalities. They give some partial reasons, but they all miss the big picture. The simple answer to the question is monetary debasement—the continued loss of purchasing power of the Australian dollar due to excessive money printing.

You can see the effect of monetary debasement just about everywhere you look. Everything that can’t be turned digital requires more dollars to buy over time, from the price of houses to Big Macs. This isn’t because they are getting more valuable; it’s because the value of money falls as more is created by the central bank. By the same token, anything that can be converted from a physical item to electrons on a wire gets less scarce and becomes cheaper. E.g. streaming movies instead of videos. Spotify instead of CDs, or the internet instead of books.

We can also observe this effect in property as continuous yield compression where rental yields (annual rent/ property price) fall over time because the denominator expands way faster than the numerator. This is because house prices increase at roughly the pace that the RBA expands the monetary base. In contrast, rents cannot keep pace since they only increase at the same rate as wages. The net effect is continuously falling yields, which we have observed since at least 1901.

The share market looks exactly the same. When you look at price/earnings (P/E) ratios, shares look more expensive than at any time in history. Mechanically, this is the same situation as property. The P (Price) is constantly increasing at roughly the same pace as the Aussie dollar is being printed, while the E (earnings) cannot keep pace.

In the long run, this always leads to a hollowing out of the middle class and a growing wealth divide. You are slowly being robbed by the actions of the central banks, and this is now becoming increasingly apparent for the younger generation who want to get into the housing market. And it’s not just limited to Australia – all central banks are printing at about the same pace. We know this because there is relative price stability when we measure the strength of the Aussie dollar against other major currencies. Yet, the money supply for all major developed countries is increasing by around 10% annually.

These periods are not new, and they have repeated themselves many times throughout history at an average of once every 80 to 100 years for the reserve currency. Given a long enough timeline, all the value flows to hard assets and things that are difficult to inflate, such as gold, certain commodities, land, and factories that make real things.

Posted by Gavin Chau, on 2nd Jul 2024