Thursday's Top 10 with NZ Mint: 'Developer specials' in Matarangi; Australia's housing bubble; US exporting speculative debt; US monetary secession?; Dilbert

Here's my Top 10 links from around the Internet at 10 to 1 pm in association with NZ Mint.

Plenty of cartoons and charts today.

The mood around the world is revolutionary at the moment.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

1. 'Developer specials' - This detailed report from Rodney Dickens at SRA on the property market at Matarangi on Coromandel Peninsular (the beach resort that Mark Hotchin built) should be required reading for anyone thinking of buying sections there or anyone still unlucky enough to hold shares in Allied Farmers...

Rodney also has this excellent piece on coastal property.

He is a star.

He paints the picture of deluded sellers and non existent buyers.

Matarangi always struck me as too far away from Auckland and over priced.

Apparently, though, Mark Hotchin wants to cheaply buy back the sections he flicked on to Allied Farmers at inflated prices.

Sigh.

Read this and weep.

Many of the sections for sale on the secondary market in Matarangi have been for sale for some time. The market is not clearing with would-be vendors in general still asking prices similar to what they originally paid although we found some notable exceptions. Lots 1261 and 1262 in The Grove stage of the development were listed for sale by the developer for $225,000 when we visited Matarangi in 2007, but were on sale as “developer specials” asking $141,750 when we visited a couple of months ago.

Lots 1808, 1809, 1812 and 1813 front on to one of the lakes and were being offered as developer specials at $225,000 versus original asking prices of $375,000. These represent 37% and 40% drops respectively which is in the ballpark of what we believe needs to happen to start clearing the market (e.g. to sell a significant number of the 60 sections listed for sale asking $201-250k the price band needs to come down to $127-158k or even lower).  

2. 'Just like Ireland' - The Economist has run the numbers again and found Australia to be the most expensive market in the world.

This week in The Economist we will publish our quarterly index of house prices around the world. Australia's homes are the most overvalued in the index. The ratio of prices to rents in the country is fully 56% above its long-run average (see chart).

Many economists in Australia argue that the country's lofty property prices are justfied by a variety of fundamentals. Immigration has swelled the population, and zoning regulations, infrastructure charges and the like have imposed artificial constraints on the availability of land. (I must confess that I smile when I read about land scarcity in Australia. I am writing this from the 60th floor of an office tower in one of the most crowded places in the world. If Australia were as densely populated as Hong Kong, it could accommodate all of the world's people seven times over.)

These fundamentals no doubt matter. But one of the virtues of a price-to-rent ratio is that it takes them into account. If immigration is putting upward pressure on house prices, it should put upward pressure on rents too. And if developers can't build homes, they can't build rental homes either. Those factors may justify high prices. They don't justify high price-to-rent ratios.

In our house-price index we take a simple historical average from 1975 to 2010. But perhaps something has changed in Australia in that time that now warrants a higher ratio. The chart is certainly suggestive of some kind of structural break after 2000. Charts for Ireland before the crisis looked very similar.

3. Even Australian CEOs want it - A capital gains tax on owner occupied houses that is. Stuart Washington from the SMH.com.au finds 5 top Australian CEOs who worry about booming house prices and a hollowing out of their workforce.

They need to look eastwards for a living and breathing example of what happens when a property bubble makes housing unaffordable for young families in the country's biggest city.

A capital gains tax on owner-occupied homes was needed to cap prices. This would attack one of the sacred cows of the tax system. The top rate for capital gain on investment properties is 46.5 per cent, reducing to 23.25 per cent if the property is held more than a year.

"Capital-gains-tax free on housing is poor policy because fundamentally it over encourages people to invest in their home," Dr McNamee said. In 2009 the International Monetary Fund called for a capital gains tax on owner-occupied housing, arguing the current tax-free position encourages people to borrow too much then pay inflated prices for houses.  

4. The revenge of trickle-down economics - I'm enjoying the comments from Richard Woolf at The Guardian's CommentisFree site. In this piece he laments the largely pointless wrangling over the US budget deficit.

He says both parties have agreed the only way to give poor people money is firstly by giving it to the rich.

I'm quoting this at length because it explains a broad picture well from the point of view of a non-interested observer.

Both sides agree that government spending will continue to follow the old "trickle down" theory, despite its failure to date. Massive federal outlays on the largest banks, insurance companies and selected other large corporations produced a "recovery" for them, but not in the rates of unemployment, home foreclosures and state and local austerity budgets that keep crippling the US economy.

Federal largesse has yet to trickle down, but both parties proceed on the assumption that it eventually will. Neither party tallies the economic and social costs of massive unemployment, home loss and state and local austerity budgets. Neither party offers any alternative to "trickle down", as if no alternative exists or is worth debating.

Yet, of course, there are alternatives. In the 1930s, capitalism's last major global breakdown, then President Roosevelt eventually pursued the alternative "bubble up" theory. Between 1934 and 1940, he created and filled 11m federal jobs with unemployed workers.

Their incomes enabled them to maintain mortgage payments and buy goods and services that provided jobs to millions of others and profits to many US businesses. That alternative to trickle-down economics did not suffice to overcome the Great Depression. However, it certainly alleviated more of the economic damage and individual suffering of that breakdown than Bush's and Obama's trickle-down economics have achieved in this one.

Then, too, there is the alternative of taxing corporations and the rich to finance federal stimulus without huge deficits and increasing costly national debts. That alternative is even more taboo in Washington than a bubble-up government employment programme. Politically, Roosevelt's bubble-up approach won him the greatest outpouring of electoral support ever achieved by any US president. So it might today for Obama. Why, then, would a politically besieged president hesitate to repeat some variant of Roosevelt's successful strategy?

During the 1930s, the CIO was successfully recruiting millions of workers into unions: a powerful labour movement, combined with socially influential and growing socialist and communist parties, organised pressure from below. Today, those movements are either gone or extremely weakened. Then, the flow of money into US politics from corporations and the rich was relatively less powerful than it has now become, in terms of campaign contributions and legislating lobbying funds dependent on those sources. Republicans and Democrats alike depend on them. No wonder they and the president agree on so much and dare not consider or debate alternatives, of which their benefactors might disapprove. 

5. Exporting speculative debt - The US Federal Reserve is printing money and it is squirting out the sides, sparking booms in commodity prices and unleashing civil unrest.

But it's only US$600 billion that the Fed is buying. How could that little mayhem create so much mayhem? The power of leveraging by hedge funds using near zero interest rates.

Here's Ashvin Paundurangi at The Automatic Earth explaining how it works. The chart below helps tell the story.

The Federal Reserve has indeed printed money and helped drive up commodity prices throughout the global economy, but none of this price "inflation" is achieved without its trusty sidekicks, the major investment banks (hedge funds), and their weapon of choice, leverage. This dynamic represents the tail end of one that has existed for several decades, where financial consumers in both developed and developing economies had artificially increased demand for dollar-denominated commodities such as crude oil, wheat and corn.

While most of these consumers no longer have access to any credit and are struggling to pay off debts, the major banks have virtually unlimited access to free credit from central banks. This credit is used to speculate on stocks, bonds and commodities for short-term profits, just as it had been previously used to speculate on real estate. In this sense, the Fed is not "exporting inflation" as the WSJ article argues, it is exporting speculative debt.  

6. Tick tock - The Economist points out that time is running out for the US government before it has to shut down because of a dispute in Congress about how to fund America's budget deficit. Some, including the Treasury Secretary, have suggested America might default. There are deals being done for short term extensions, but it's not pretty.

BEFORE November’s election, Republican leaders in the House of Representatives solemnly promised that they would cut spending by $100 billion this year alone if voters put their party in charge. Voters did, in the House at least, and on February 19th the new Republican majority repaid the compliment by approving cuts of $100 billion in the budget Barack Obama proposed for last year (compared with the short-term “continuing” spending resolutions Congress has actually adopted, the cut is only $61 billion).

The hitch is that the measure will not become law, since the Democrats who control the Senate, not to mention the president with his veto pen, are implacably opposed to it. With the continuing resolution due to expire on March 4th, there is little time to work out a compromise, and little evidence either side wants one.  

7. This is the best writing I've seen so far about the earthquake in Christchurch -  And it's from blogger Cheryl Berstein.

8. 'Why aren't they angrier?' - The Governor of the Bank of England wonders here in this piece in The Telegraph why British people aren't angrier at the banks. Too bloody right Mervyn.

He also wonders if living standards in Britain will ever recover.

Oh boy.

This is from the governor of the Bank of England no less. Quoted in the Torygraph.

Hardly a lefty nutter.

Mervyn King today claimed the fall in households' living standards was the fault of the financial services sector and he expressed sympathy that innocent families paying the price.

"The people whose jobs were destroyed were in no way responsible for the excesses of the financial sector and the crisis that followed," he told MPs on the Treasury Select Committee.

In most aspects, he said, the economy had been on a sound footing before the crisis. Previous downturns were often caused by inefficiencies or weak management and were useful opportunities to improve systems.

"None of that applied in this crisis," he said. "We had quite a successfully operating economy." The people who are now suffering "did not get bonuses of the scale people in the financial sector got".

The financial crisis may have occurred two years ago but, as austerity measures kick in, "the cost is now being felt", he said. It remains "a big political problem", he added: "I'm surprised the real anger hasn't been greater than it has."  

9. 'Let's secede' - Republican State Senator Bill Ketron in Tennessee has filed a resolution to look at creating an alternative to the US dollar in Tennessee.

WHEREAS, in the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System, for which the State is not prepared, Tennessee’s governmental finances and private economy will be thrown into chaos, with gravely detrimental effects upon the lives, health, and property of Tennessee’s citizens, and with consequences fatal to the preservation of good order throughout the State; and

WHEREAS, Tennessee can avoid or at least mitigate many of the economic, social, and political shocks to be expected to arise from hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System only through the timely adoption of an alternative sound currency that the State’s government and citizens may employ without delay in the event of the destruction of the Federal Reserve System’s currency 

10. Totally relevant art exhibit - This exhibition of archival inject print on rag paper is causing a stir at the New York Art Fair. It's by Dan Tague at the Jonathan Ferrara gallery and it's called 'We need a revolution'.