Property investment in a steady state economy - can it work?

[Peter Parker]

THE SMH has an article about The Greens' economic policies, particularly that of a steady state economy.

This concept is far more radical than anything from Liberal or Labor and is as different from today's capitalism as communism was.

Indeed steady state may even be more different - both capitalism and the lead-up to communism envisaged an intensification of productivity and worshipped growth, whereas steady state does not.

http://www.smh.com.au/federal-election/the-watermelon-party-20100730-10zsb.html

The most significant parts of this for property investors are:

Incomes are lower but working hours are reduced.

The credit/debt system is phased out; consumers and investors must save.

Population growth is retarded; the average age increases.

I think the most important aspect of a steady state economy is that the existence of inflation can't be taken for granted.

Inflation is what makes leveraged property investment work - it lowers the effective value of debt (even if borrowed interest only) and allows today's (increased) rent to pay off yesterday's (decreased) debt, so improving equity and cashflow over time.

Banning borrowing would cause those assets whose values are supported by it to collapse.

Even without borrowing it is concievable that house values could rise if demand rises. But the pursuit of zero population growth reduces demand compared to now, although without coercive population settlement policies there will still be areas with faster population growth than others.

Hence building activity would be limited only to construction of new dwellings in faster growing areas or as redevelopments of inner-city sites. It would be a lot less than now. There'd likely be an emphasis on making do or renovation rather than building new.

I am not sure what would happen to affordability given that both wages and house prices will slump. Or at the least they will not grow.

The economy is inherently unstable, and it seems easier to keep it moderately inflating (2-4%) than 0% inflation. But steady state economies appears to require this.

Though house prices and wages might fall, it's likely house prices will fall faster due to the removal of credit. There will however be some people who can't afford to buy (despite this boost in affordability). Hence there will continue to be landlords.

Property will thus be seen as an income source rather than a capital growth play. This requires either rents to go up or values to go down; the latter is probable if credit is withdrawn. Steady state will reward renovation and conversions, especially of medium density housing near transport hubs.

Highly leveraged investors will lose greatly as the adjustment from an inflationary to a steady state economy will be painful. In contrast those with little leverage will survive, though future capital gains are less likely without population and credit growth.

 

[WinstonWolfe]

Leigh Harkness an Australian economist has some interesting thoughts about economic stability. It is quite technical reading though.

See the paper "Generating balanced demand and supply to achieve full employment and price stability."

Controlling bank credit and the exchange rate are critical in stabilizing supply and demand so as to attain price stability. I'd try and understand that stuff so you can more critically appraise the Greens' ideas.

 

[Ausprop]

sounds more retarded than steady? an invitation for an invasion

 

[Paul Do]

> Property investment in a steady state economy - can it work?

It would be similar to investing in other western economies that don't have to rely on a shortage of supply to drive returns.

New investors will start to understand what investing is really about - letting time do it's thing. There won't be silly comments along the lines of capital gains over the last 10 years repeating in the future etc.

 

[Neophyte]

It would change the dynamic of new property investment. Basically the price of a property would be X times the rent, where X is based on a long term fixed interest rate. This is roughly the case in some european countries where there in basically no population growth.

The problem would be a massive one time adjustment of rents and values. This adjustment would mostly be a decrease in capital values, I would guess to be around 50% for many negatively geared places. E.g. 4% rents goes to 8%.

I don't know how this could possibly work since the one off value hit would bankrupt most investors and their bankers. Making that sort of adjustment would take a 20+ year timescale I think.

 

[topcropper]

THE SMH has an article about The Greens' economic policies, particularly that of a steady state economy.
.

I don't quite understand why that article thinks population growth would be retarded under the greens. I thought that with their humanitarian objectives, immigration would increase.



Check out their policies regarding immigration,......

http://greens.org.au/policies/care-for-people/immigration-and-refugees

They want,...
No mandatory detention
End offshore processing
Climate refugee visas

Principles
The Australian Greens believe that:

1.the presence in Australia of people of many cultural backgrounds greatly enriches our society and should be celebrated.
2.Australian society, culture and the economy has benefited, and will continue to benefit, from immigration of people from around the world.
3.immigration must be non-discriminatory on the grounds of nationality, ethnic origin, religion, language, gender, disability, sexuality, age or socioeconomic background.
4.Australia has humanitarian and legal obligations to accept refugees and reunite families.
5.asylum seekers and refugees are no more of a threat to our borders or to society than anyone else and must be treated with compassion and dignity.
6.Australia must assess in good faith all asylum seekers who arrive on our mainland or any of our islands, without discrimination based on the method of arrival.


Goals
The Australian Greens want:

7.an immigration program that is predominantly based on family reunions and other special humanitarian criteria as defined by international human rights Conventions.
8.all migrants to be given access to a full range of culturally sensitive, appropriate health services including a comprehensive medical examination on arrival.
9.services for new migrants to include appropriate English language classes, social security, legal and interpreter services, programs to ease transition to Australia's multicultural society, and post-trauma counselling where needed.
10.the elimination of the policies of mandatory detention, and other forms of harsh, punitive or discriminatory treatment of asylum seekers and refugees.
11.asylum seekers who arrive without a valid visa to have their claims for asylum assessed while living in the community.
12.planning for climate change refugees with a particular focus on the Asia-Pacific region.


Measures
The Australian Greens will:

13.ensure that potential immigrants are not unfairly discriminated against on any grounds.
14.increase the share of places for off-shore refugees and humanitarian entrants.
15.ensure that funding for public and community sector agencies providing migrant-specific services is increased to a level sufficient to provide adequate, effective and timely support.
16.ensure the development of networks, materials and programs that increase community understanding of the causes and benefits of migration.
17.abolish mandatory and indefinite detention of asylum seekers.
18.abolish discriminatory separation of refugees into permanent and temporary visa categories based on whether or not they arrived with a valid visa
27.ensure asylum seekers living in the community while their claim is assessed will be granted an AAV which will entitle them to travel, work, income support and access to ongoing educational and medical services anywhere within Australia while their claims for asylum are assessed...

The whole idea of mandatory detention for a period of time is to act as a bit of a disincentive to coming here in the first place.

If assylum seekers will be living in the community while their claim is assessed and granted an AAV which will entitle them to travel, work, income support and access to ongoing educational and medical services anywhere within Australia while their claims for asylum are assessed, it's a big invitation.

Now that's all very humane and kind and generous and all, but I could see illegal immigrant numbers increasing by multiples under such a policy. They'd end up chartering cruise liners and coming here.



Climate refugee visas could mean we end up with half Bangladesh here at some stage.



I'd reckon under greens rule, immigration would increase, not decrease.

Then, there probably wont be any more dams under any political party anyway, but under the greens there would definately be no new dams, so that means desalination plants. Under the greens there'd be no more gas or coal power stations to power the desalination plants. Mining and agriculture would be restricted so there goes a lot of our export income.

It wouldn't be a steady state economy, it would be a rapidly declining one. Picture a jumbo in a nose dive, that sort of decline.


See ya's.

 

[Aaron Sice]

it would work GREAT if the other countries took it on board as well.

otherwise, you're just a black sheep.

 

[WinstonWolfe]

Considering migrant children from other cultures tend to integrate, and the Greens think multiculturalism should be encouraged and celebrated because it enriches the nation, they obviously have a policy of perpetual migration.

And migration should be prioritized over natural population increase, because kids born here don't enrich the nation as much.

 

[HiEquity]

I don't quite understand why that article thinks population growth would be retarded under the greens. I thought that with their humanitarian objectives, immigration would increase.

Hi TC

Note those policies only discuss asylum seekers. Asylum seekers currently represent an insignificant proportion of all immigration and could increase orders of magnitude without making much of a dent. Note that you have to actually be a genuine refugee to qualify for entry under that mechanism - there really aren't all that many people in genuine fear of their life who can make the trek to the land of Oz, particularly in the context of overstaying English backpackers...

The Greens are generally recognised as being more hard line on standard immigration, including people overstaying their visas (whose numbers swamp asylum seekers by far more than an order of magnitude). This is due to their desire for a "sustainable" Australia in terms of population etc. Cutting the standard number of immigrants (457 visas etc etc) would actually have a significant effect on net migration, as against asylum seekers, who would have bugger all effect. Some would argue the Greens would actually prefer Australia to not have any people at all - they are yet to draw that particular line though.

Hope that helps!

 

[topcropper]

Hi TC
Note those policies only discuss asylum seekers. !

OK. Good points as always.

So I looked more in depth at their policies,.....

http://greens.org.au/policies/environment/population

Their main slogan is ,...."Environmental impact is not determined by population numbers alone, but by the way that people live"...



Sounds a bit like Julia's after she had a backflip on the 'Big Australia' idea.

Principles
The Australian Greens believe that:

1.Australia must contribute to achieving a globally sustainable population.
2.our environmental impact is not determined by population numbers alone, but by the way that people live...!

There's another 14 points, including the frightening one,....

16.prepare contingency plans for possible large scale humanitarian migration as a result of climate change....!

All a bit airy fairy. You could make anything out of it, but I seriously doubt the greens would reduce population growth, even though any rational thinking person knows it the simplest way to achieve a benefit to the environment, especially when all immigrants automatically consume more when they move to Australia than from where they came from. The average Australian consumes food higher up the food chain, we consume way more energy, consume more water, own more toys and cars, travel more, especially on airlines and produce more CO2 than almost anywhere else.


See ya's.

 

[Deltaberry]

New investors will start to understand what investing is really about - letting time do it's thing. There won't be silly comments along the lines of capital gains over the last 10 years repeating in the future etc.

Don't know if I'd use the word silly. Isn't it just a function of economic expansion driven by a relatively positive trade surplus, rising commodity prices, regional asset appreciations, strong immigration and so forth?

If we want a closed economy (hence flat population growth and so forth), why not just look to New Zealand when Helen Clarke closed her shores 15 or so years ago? We had an apartment in Auckland CBD from that long ago and I don't think it's gone up in value at all.

I think "new investors" will just simply look to invest in better performing markets rather than adapt to what "investing is really about" in such a stagnate Australia.

As for the increased use of debt and so forth, I've always taken it just as efficiently utilising lazy balance sheets. I don't know if a high net cash balance and high savings that sit in an account doing nothing necesarilly reflect productiveness and there're many schools of thought that talka bout this. It's all about striking a balance.

 

[HiEquity]

All a bit airy fairy. You could make anything out of it, but I seriously doubt the greens would reduce population,

Agreed. They don't really define their population policy because that would highlight the inherent conflict between their "green" position and their "left wing" position. Too hard - so just sweep this issue under the carpet like everyone else with some nice motherhood statements!

However I think they could easily find it within themselves to significantly reduce skilled migration etc (non asylum seekers - ie the vast majority of immigration) in the short term if they had the chance. That would bring population growth down a fair bit so they're probably the best bet on that front, as painful as that may be!

On the topic of the thread, I would say yes but the transition would be very painful indeed for a whole lot of people, including anyone who owned a house (an awful lot of people...). So pretty doubtful it would actually ever happen...

 

[MrCrumbpacker]

It would change the dynamic of new property investment. Basically the price of a property would be X times the rent, where X is based on a long term fixed interest rate. This is roughly the case in some european countries where there in basically no population growth.

The problem would be a massive one time adjustment of rents and values. This adjustment would mostly be a decrease in capital values, I would guess to be around 50% for many negatively geared places. E.g. 4% rents goes to 8%.

I don't know how this could possibly work since the one off value hit would bankrupt most investors and their bankers. Making that sort of adjustment would take a 20+ year timescale I think.

Absolutely spot on Neophyte, .....interesting isn't it, ....the idea of a property market just like the rest of the world, where property investment meant sensible returns on realistic prices, or development potential, and not ever increasing and inevitably unsustainable capital gains.

 

[Jen_PFR]

The whole premise of a steady state economy is based on a number of assumptions that really don't apply in the real world, or at least not this real world as we know it!

Unless Australia completely closes its borders to all trade, there is no possibility of immunity from global currency fluctuations, and the impact of these on Australia's own inflation (or deflation) rate. This is just one of the many thoughts that immediately sprung to mind as I read the OP's post.

It's an interesting theoretical idea, but impossible to bring about in reality.

And, at the risk of getting a lot of stick - I am an economist in real life. (I rarely admit to this.) If that counts for anything, which it probably doesn't!

 

[Deltaberry]

Given the prevailing sentiment in this country is anti-immigration and anti-Asians at the moment, I'd imagine they would easily forego their leftist origins and cut back migration, including skilled migration.

Funnily you'd think a rightist party like the Abbott Party would be the one to do that - on hang on, they are doing it.

 

[Bill.L]

Hi all,

The one steady state economy that I can think of is North Korea. Pretty much cut off from the rest of the world and going nowhere. Cuba because it is also cut off (not as much as it was) probably fits the bill as well.

Is that was we aspire to emulate??

High Equity,

there really aren't all that many people in genuine fear of their life who can make the trek to the land of Oz

Have you ever known any boat people?? Have you ever listened to any of their stories of escape from tyranny where many members of their families have been raped, tortured and killed. I have known boat people from the late seventies (Cambodia) and recently (Somalia), their stories are eerily similar in what they escaped from and the cost of the escape (in family members sacrifice and often lives). You just do not get the real picture of what is going on in the world from the sanitized media. Do you think they know about, or care about the rules and regulations for applying to get into Australia when they are fleeing with their lives and do not know who to tell the real story to of who they are and where they come from??

bye

 

[HiEquity]

Have you ever known any boat people?? Have you ever listened to any of their stories of escape from tyranny where many members of their families have been raped, tortured and killed. I have known boat people from the late seventies (Cambodia) and recently (Somalia), their stories are eerily similar in what they escaped from and the cost of the escape (in family members sacrifice and often lives). You just do not get the real picture of what is going on in the world from the sanitized media. Do you think they know about, or care about the rules and regulations for applying to get into Australia when they are fleeing with their lives and do not know who to tell the real story to of who they are and where they come from??

Hi Bill

The reason I know a little about this subject is because some of those very close to me have worked closely with (genuine) refugees so I am intimately familiar with their stories and the impact those stories have on who they get told to...

Please read my post carefully - I was only comparing the numbers of genuine refugees coming into Australia with the normal numbers from standard immigration - in that context "there just aren't that many people".

For those people who are in genuine fear of their life (refugees), then I think we have an obligation to assist them in setting up a new life. I don’t believe that accepting genuine refugees will “open the floodgates” to immigration anywhere near the levels we current accept through our “standard” means. I just want to see the population issue debated on issues that are relevant (like skilled migration and overstaying visas) rather than on non-issues (like refugees). We can substantially increase our refugee intake and also have a net reduction in immigration if we so wish. But unfortunately we don’t hear that message very often from those who seem to have abandoned their principles…

Hope that clarifies the situation… ?

 

[Peter Parker]

Hi all,

The one steady state economy that I can think of is North Korea. Pretty much cut off from the rest of the world and going nowhere. Cuba because it is also cut off (not as much as it was) probably fits the bill as well.

Is that was we aspire to emulate??

I believe the Greens would support we emulate this since Cuba and North Korea have smaller carbon footprints per person than the high-consuming West, and hence are more environmentally virtuous. Some South American countries might also be favourites.

The less radical would favour Scandinavia, but they still drive too many cars and go on too many overseas trips to be low enough consumption for the real dark greenie.

A steady state economy just means the total is zero-sum, not its parts.

For instance the Greens would want to move from fossil fuels to renewable power. The latter could growth while the former shrivelled. However this is more socially disruptive than under a growth economy, where there's room for the older industries to lose market share but decline gracefully rather than suddenly.

The more socialist inclined greens would also want to redistribute from the rich to the poor. Both between as well as within parties (hence they support greater foreign aid internationally, higher taxes and more social welfare domestically). The attraction of this is that at least briefly you could still have the middle and working class having higher incomes while the rich get soaked.

Coupled with zero-sum redistribution this means changing the distribution of the cake is more important than making it bigger (which growth economics tries to do). In this they're like the non-historicist communists (the historicist communists supported more intensive capitalism since they thought this would bring the revolution closer).

But eventually the Green aim appears to be equality of poverty since this reduces consumption (though poor people also cut down forests for firewood) and kill animals through non-RSPCA approved methods (as the dark Greens preach veganism).

(It should be mentioned that Bob Brown, a meat eater, is a palatable moderate public face of the Green movement. Some of his hangers on have a quite anti-human agenda. And sometimes prominent candidates with values quite opposed to 'mainstream views', for instance Dr Peter Singer, or who favour what some would label masochistic policies (Dr Clive Hamilton). )

Interestingly, areas where the Greens are strongest have higher average incomes than Labor or National strongholds (conservative National seats are quite low income).

Hence they support 'post materialist' policies that will make them poor as they take their privileged economic lot in life for granted (most of their self-esteem comes from their positions in the arts, education or public service rather than money, although their consumption is probably still higher than the working classes - for instance air travel rather than McDonalds or theatre rather than hired videos).

Labor and Greens achieve high support amongst youth, and the private school set is apparently Green, whereas state school attendees tend more towards Labor.

Greens also sneer at the 'old parties' and their materialist/consumerist supporters (especially the working class/inarticulate/outer suburban ango types who support mandatory detention).

Whereas people on lower incomes who support Liberal/National/Labor want to become richer so they favour conventional growth economy policies (which they hope will make them better off).

 

[Graemsay]

I'd agree with the sentiments that a lot of green politics is rebranded socialist and even communist ideology wrapped up in an environmental message. It also tends to be very prescriptive, in that their solutions to problems are the only right way.

My younger brother did an environmental architecture course at CAT, and disagreed with a lot of what some people preached.

The Australian Greens seem to be concerned about environmental degradation, and I've heard discussions suggesting that the country could cope with a maximum population of around 25 million. That doesn't give a lot of scope for accepting vast numbers of climate refugees.

I haven't spent much time in Scandinavia, but I like what I've seen there. It doesn't strike me as being a great hardship to adopt their social model, though taxes are extremely high.

 

[HiEquity]

or who favour what some would label masochistic policies (Dr Clive Hamilton). )

Hi Spiderman

I'm wondering what you are referring to here? From my recollection Dr Hamilton is relatively mainstream in his views? At least compared to Peter Singer...?

Interestingly, areas where the Greens are strongest have higher average incomes than Labor or National strongholds (conservative National seats are quite low income).

Interestingly, the correlation is particularly high with level of education. This is what gives them some credibility for me - I'm not of the view that the less educated you are the more you know. The Greens are supported by some very smart people, although I'm sure not the "dark green" bits you refer to. Bob Brown manages to connect with educated types so the Greens can't be written off, especially in this election. My tip is for a big pick up in the Green vote with the way things are with the majors at this point.