re: government controls and other stuff

From: Michael G


Hi,

Recently I've been amazed by all the amount of new estates being created in and around Baulkham Hills/Rouse Hill and down Campbelltown way.

I see acres of land being levelled flat and stripped of all vegetation, then lights, gutters and roads being installed, with fences popping up everywhere to mark out these tiny blocks of land (sometimes less than 400sqm).

And then I see the prices being asked for this land $150k+ and way more.

Now basic economy of price is based on supply and demand and this is what gets me.

I see these estates being built in the middle of nowhere, and on the other side of the fences for these blocks are vast areas of land with cows literally mowing next door.

A few weeks ago, I saw in the paper the Government "release" 50,000 new home sites around Sydney. "Release" meaning the act of stamping a rezoning permit for land that was option 10 years ago by developers thus giving them permission to now develop the land.

And in todays paper I see quotes like;

"A land shortage in looming as the major obstacle to a happy new year for the new-home industry..."; and

"The recent announcement by the State Government that it plans to release 89,000 blocks by 2016, including the creation of a new city at Bringelly, does nothing to meet the short term need..."

"We've got a short term gap in the pipe. Land will flow quite well after that but at the moment we have a two-year window where it's going to be pretty ugly"

The following are my observations and more correctly, my opinions on this subject. Which I welcome further comment on.

- Government is constantly amazed at the price of land in Sydney, while at the same time proud of the increase in capital gains for its electorate.

- The Government is also directly responsible for the supply of land, that means it can control supply based on demand and thus influence price. By trickling out supply that are able to artificially maintain high price of land.

- Infrastructure is rarely in place in time for the release of land, thus making such actions of releasing land counter productive as this turns people off such land.

- The Government sees the housing industry as the Golden Goose for all its economic problems and basically wrings its neck to get a golden egg (land release) every time the economy turns sour. The land release stimulates building and generates jobs and spending.

- It's also my view that if the Government trickles out land, thus keep land artificially high, and possibly the cost of construction (because less work in a certain time means high rates to generate the same amount of income) then this means Governments would be responsible the total cost of the house and land. The nasty part is that if they are the 'cause of the high price of housing, then they are also the one's responsible for people spending more than 1/3 of their income just to shelter themselves.

- After thinking about the above point, I thought how people buy houses, that is via bank loans. So then there's this idea of Governments inflating property, people having to borrow more money and that in turn results in bigger loans meaning larger interest payments.

- So Governments inflate property prices and people borrow more and pay more interest to banks and they in turn make larger profits.

- What I think is really funny is the idea of fractional banking. Land goes up, people pay deposits into banks. Banks place a % of this cash with the Reserve Bank as a "reserve" and then the banks are allowed to "lend out" multiples of this "reserve" based on a multiplier. They create money out of thin air and charge interest on it. Basically people give the banks funds to pass on to the RBA, so banks can "lend" back this "magical" funds back to the people.

- And then I just have to laugh about interest rates. Now remember the Government doesn't control the interest rates, the Reserve Bank does. So when the RBA thinks the Government is stuffing up the economy the RBA does two things 1) the decrease the reserve banks have to place with the RBA. This means banks need less cash to make the same amount of loans (and remember loans = interest = profits). So lending becomes easier. 2) they decrease interest rates (making money cheaper to acquire).

This combination means there's more "money" injected into the economy. Why?, well let's say this reserve was 5%, for every $5 deposited at the RBA by banks, banks can lend out $100. Imagine a bank asking for a 10% deposit.

You give a bank $10,000, the bank places that $10k with the RBA and they then allow the bank to lend $200,000 ($10k = 5% of $200k).

So the bank lends you $90,000, and lends someone else $90,000 and take the balance and invests that on the short term money markets to a) hedge against possible loses b) make more profit.

Now because there's more money around, but the same amount of "stuff" as before, the value of each dollar is less. That's when inflation becomes an issue. When people have more money to buy stuff they aren't as tight fisted about their spending (which is another way to talk about inflation). So they are happy to pay more for something they "want". So prices rise, and then people need more money to buy more things, etc, etc.

So what does the RBA do?, they increase the cost of money by boosting interest rates. At the same time they increase the reserves required by the banks. The higher rates means less desire to borrow, and the higher reserves "suck back in" all that extra cash that was floating around.

And on top of all this, we have currency traders deciding what our money is worth on the global economy and that affects how much our products are worth to the rest of the world and that plays havoc with our imports and exports.

Soooo, next time you see a property for sale and wonder where to start to negotiate, think about how that price was determined and how was involved in making that price.

That price is just a figment of everyone's imagination.

Happy Buying
Michael G.
 
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Sim

Administrator
Reply: 1
From: Sim' Hampel


Absolutely brilliant MG... I love it ;-)

 
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Reply: 1.1
From: Roderick Aguilar


Absolutely beautiful Michael! You've just explained in a nutshell that money doesn't really exist. It's all imaginary! So taking this in hand, if the RBA and the Government can make money out of thin air, then so can you! Money does grow on trees!

Cheers,

Roderick Aguilar
 
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Sim

Administrator
Reply: 1.1.1
From: Sim' Hampel


Actually, I would prefer it if money grew on bushes that were about 150cm high... it would be easier to pick then.

Vines would be just as good though.

Come to think of it, vines would be excellent... then you can have both grapes and money vines in the same vineyard... loads of fun !

Hmm... I wonder what would happen if you tried to graft a money vine onto a grape vine. I suspect Penfolds have already discovered that ;-)

 
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Reply: 1.1.1.1
From: Even Steven


Think about this.
When the government injects more money into the economy, it enters the economy via the spending that the government does. At that point the money still has full value as it hasn't spread through the economy yet. By the time it gets to us it has lost value and that's what inflation is. So the government gets full value and we get partial value from the same money. In other words inflation is just another tax.
 
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Reply: 1.1.1.1.1
From: Roderick Aguilar


ES,

It took me a while to figure it out but even though that by the time it reaches us, money has already lost some value, the rich have figured out a way of increasing its value. The rich actually benefit from what the government is doing. The rich buys well, then they bank on the powers that be to push up demand along with prices and then they either take their profit for a quick return or hold onto it and keep revaluing every 6 months to see just how much the government has made for them. They then use this increased value (equity which they had not worked for) to buy even more investments. And like Michael Pettett says, the government is very reluctant to change laws that affect the rich. Probably because the change would also affect the Government's income.

Cheers,

-Rod.
 
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Reply: 1.1.1.2
From: Owen .


Where do you come up with this stuff Sim'? I love the train of thought that got you to your conclusion. Time for another glass I think...
 
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Reply: 1.1.1.2.1
From: Anony Mouse


Ah yes
It is called fiat money,the trick for Governments is to dole it out without causing too much inflation.
See a marvellous site by Glyn Davies at
http://www.ex.ac.uk/~RDavies/arian/llyfr.html

"A government that robs Peter to pay Paul can always count on the support of Paul."
Of course, Paul's support is obvious, but it is equally obvious that to rob from Peter to pay Paul will make Peter
very, very angry.
My question is this: "How can you run a good government with a sore Peter?"
 
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