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David Chaston on unfair tax on gains; the changing workforce; China's bubble and stimulus, jobless youth; NZ's bubble; KiwiSaver risk; student debt; Dilbert & more

David Chaston on unfair tax on gains; the changing workforce; China's bubble and stimulus, jobless youth; NZ's bubble; KiwiSaver risk; student debt; Dilbert & more

Here's my edition of Top 10 links from around the Internet today.

It's charts, charts and more charts today.

We have a Monday-Wednesday-Friday schedule for Top 10. Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. Hard, but a policy change we must have
We start today with an NZIER chart that explains exactly how the housing distortion works, and why we just have to have taxes on all gains without exempting housing.

The only difference between these two examples is tax.

I suspect starting out taxing gains on the family house is too hard politically, but surely we can start with landlord's untaxed gains? That would not only level the playing field, it would rid us of those odious "specialist investment property service" spruikers, which are aimed at the naive.

Once that is bedded in, then the 'second house/holiday house' could lose its exemption.

And then ...

2. The workforce is changing
Here is a chart that frightens many people. They see it as a look into "our future". It tracks Japan's 'working age population' for ages 15-64 and that has fallen from about 87 mln in 1995 to just 77 mln twenty years later. The decline looks frightening, more so in Japan's case because female participation in the workforce is low.

But is this really New Zealand's future? Personally I doubt it.

I am outside the charted demographic, but still working. I (and probably you) know many many people like that. Like many of them, I don't need to, but choose to. But the demographers seem stuck in definitions of twenty years ago. Time for them to get a bit more realistic.

Last week's HLFS revealed there are now almost 130,000 people working who are over 65, about a 21% participation rate, and they have a remarkably low 1% unemployment rate. These are all record highs. True, some will need to but that has always been the case. The extra people working will likely be by choice; at least that is my opinion.

In fact, in New Zealand there are now 84,000 people working who are between 65 and 70, up from just 34,000 ten years ago.

I think it is time we stopped obsessing about "what Japan signals". This chart is not about New Zealand, no matter how many times it gets published.

3. A bubble ready to pop?
China’s housing market is in a slump, and it might be too late for the government to do anything about it. The country relies heavily on property to prop up economic growth, and a slowdown of the world economy’s most important growth engine will be felt acutely, especially in commodity markets. This chart is from Quartz.com :

4. Don't call it stimulus
In the past 21 days, China's National Development and Reform Commission has approved building 16 rail lines and five airports, for an all-up spend of almost NZ$150 bln. You will need Google Translate to read the article here announcing the projects, but that is a lot of sudden spending on infrastructure.

Might have something to do with the chart above ...

Apologies to fluent Mandarin readers, but this is part of what Google Translate came up with in its raw fractured state; but you get the drift:

"The current economic downward pressure, the government began to emphasize the apparent steady growth, the railway infrastructure are accelerating, shrinking to hedge real estate and private sector investment." Minsheng Securities research vice president, chief macroeconomic researcher tube Kiyotomo WASHINGTON reporter on said the real estate investment long cycle weaker overcapacity situation has not been fundamentally alleviated investment within manufacturing raw power shortage, economic stabilization and to rely on infrastructure investment lifts.

Guo Lei pointed out that the field of railway infrastructure is not there is excess capacity, and also a wide range of industrial chain pulling effect, the field is expected to accelerate infrastructure investment will generate stimulating effect on the economy in 4-6 months after the end of the first quarter of next year the economy or You can feel the power of the current round of changes in the demand side.

It is worth noting that this round of approval of a majority of railway construction projects located in central and western regions, which is also this year's April 2 executive meeting of the State Council's "speed up railway construction railway particularly in the Midwest," the spirit of the same strain.

5. Not what it seems
Nothing gets a good headline like youth unemployment levels. As we got the September quarter data last week, I took a look again at this number and it was high again at 19.3%. That is, 24,800 people aged 15 to 19 were unemployed. I have made the point before that as soon as this age group grows up, its unemployment rate drops back to normal. Five years ago when those in the 20-24 year old group were teenagers, they had a youth unemployment rate of 25.1% whereas today that same group has an unemployment rate of 10.3%. Ten years ago, teenagers had a 12.2% unemployment rate and this same group today has an unemployment rate of just 6.5%.

The reason teenagers 'suffer' high unemployment is more than lack of opportunity. It is also because more and more of them are in education or training so the few left not in employment, education or training (NEET) are a smaller and smaller subset of more difficult-to-employ people. That makes for a fancy headline, but not much else. Its a social issue more than an employment opportunity issue

If we applied the participation rate to this group at the rate it will be after they have finished education and training (25-29 yrs), then you get the adjusted red line in the chart above, and that is not so scary.

If we also look at the whole sweep of that age group, you can see the actual number of unemployed has actually changed very little. It is the same today as it was 30 years ago at about 25,000 unemployed. Less are 'employed' in this age band. But there are many more in training and employment. We have made good progress I would argue and continue to do so. This progress, especially among females, has given us an overall participation rate the envy of the developed world.

6. Our turn soon?
When observers look at world housing markets, this next chart is what they see.

You don’t have to look too far back in the financial history books to find episodes in which real estate bubbles ended badly. Japan. Sweden. Spain. Ireland. And, the mother of them all, the US.

Some are worried that Canada could be careening down a similar path (followed by New Zealand). Sure, there are differences. Our banks seem to be on a relatively solid footing. And the structure of the NZ mortgage market -home loans are full-recourse - might prevent a drastic surge in defaults US-style. (That is, the borrower takes severe pain before the bank does.) Still, it does make you wonder. No doubt we are in a bubble.

7. Good advice?
If you think there are parts of the Auckland housing market that are pretty frothy, you won't get any argument from me. But it must be catching. Analysts at UBS have recently pointed out that the NZX price/earnings ratios are pretty frothy too.

The S&P500 and the Dow30 are at record levels, but the NZX has even higher PE multiples, and they are now a long way above their long-run averages.

Let's hope KiwiSaver fund managers are not expecting them to keep rising. A fall is in the offing, methinks. Most kiwis are exposed to this risk via their KiwiSaver funds, so if that is you, be warned.

Still, having noted that, UBS has only four of the forty stocks in their holdings as a 'sell' (Spark, Trade Me, Ryman, and SkyTV) while they have 16 rated as a 'buy'.

8. Wobbly giants (becoming dwarfs)
Another eye-popping chart, this one also from Quartz. The finances of Argentina and Venezuela, respectively the second- and third-largest economies in South America, are once again in shambles.

Argentina notched its second default in 13 years in July, when it failed to make a $539 interest payment to creditors. (That was part of a long, complicated fight with creditors.)

Meanwhile, doubts about credit-worthiness have increasingly hovered over Venezuela, where surging inflation and price controls are leading to shortages and rationing.

If you owned $10 mln in Venezuelan bonds would you spend $2 mln insuring them? Good money after bad, I would think.

Defaulting on debt is not a good thing to do, even for sovereign states. WDKHLWE.

9. Changing behaviour?
Here's another eye-catching chart from America. Students there now owe US$1.1 tln in student debt. This horrifies observers.

In New Zealand students and ex-students owe NZ$14.2 bln.

Rough back-of-the-envelope calculations based solely on a population basis (317 mln vs 4.5 mln), the comparative number if-the-US-was-NZ is that the US would have NZ$20.1 bln. So the US has 42% more student debt, per capita, than NZ. But given they have always had formal student borrowing and we only really started in 1992 perhaps the gap is not as wide as you might have expected.

And this isn’t all bad news - more people are in now study, which is a good thing.  See #5 above.

But some economists suggest that the burden of student debt is reshaping the spending patterns of younger people, prompting them to put off buying houses, cars, and much else besides.

10. Market volatility
A frightened investor goes to his financial planner and asks if he’s at all worried about the volatility of the markets these days.  The planner replies that he sure does! In fact, he says that he sleeps like a baby. The frightened investor was amazed!  "Really? Even with all the fluctuations?" "Yup! I sleep for a couple of hours, and then I wake up and I cry for a couple of hours."

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35 Comments

"NZX price/earnings ratios are pretty frothy too."  only 6 years or so late.

regards

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True, the NZX is a shocker, and buying future earnings that the directors  predict is notoriuosly unreliable .

At least with property you can look at it see it feel it , and as long as the flood gates are open for migrants pouring in  , it has to go up in value

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Just remember,  "this time its different".

The problem is the debt...and the imbalances in the housing and other sectors who seem to be in an dis-inflationary environment.

regards

 

 

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#2.  I too David don't get the problem and the obsession about changing demographics.  eg Japan.   There are advantages in a stable population.

A stable population will mean difference in all sort of things true.  But difference is not a problem - it's only a difference.

What if we had a stable population - not growing.  It would mean we could catch up on infrastructure over time, and once done, no more wringing of the hands over how to afford all the new stuff.  Wonderful.

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"What if we had a stable population - not growing.".  No housing crises, no infrastructure that is insufficient by the time it’s built, less crowds (everywhere), the same resources shared amongst less people.  Literally the solution to 90% of NZ’s problems. 

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As i understand it all money is loaned into existance. A stable poulation is not increasing its borrowing so therefore there is no new money to pay back existing debt. This is the reason the US,the EU and Japan are desperate to try and encourage more borrowing to pay back the existing exorbitant debt. Unfortunately they have destroyed the middle class who are worried about their retirement and unwilling to take on more debt. It is long past time an economic system that can cope with low or no growth was developed.

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Yes indeed - the middle classes have endured significant real pay cuts since 2008 - up to 8% in the US. Tough to extinguish debt by any means on diminishing incomes.

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#7.   Frothy ?  Absolutely.  And it is indeed a worry.

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#9 - It's insane to charge for education. The result is a young educated workforce, crippled by debt which they'll never be able to pay off, or an uneducated workforce who will not be able to find employment which pays enough to live on.

.

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Except of course someone has to pay for it. 

On top of that the demand for something free is infinite.

regards

 

 

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Yes, somebody has to pay for it. Nothing is free, but surely educating the next generation(s) can be seen as an investment by the current workforce?

Demand for smething free is infinite? I doubt it. There will always be those who are not academically inclined, and will prefer to learn a trade or a skill, as opposed to getting an academical degree.

 

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DFTBA - at the end of the day it doesn't really matter whether a person holds an educational qualification, trade, skill or otherwise.......the real investment is what that person decides to do with their life, how big a contribution they are willing to make!!

 

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Depends. 

a) we cannot grow forever so really highly educated ppl with no jobs? achieves what? so long term thinking is not possible it seems.

b) Lots of media studies degrees and more accounatnts and lawyers? no thanks I'll pass on paying for that.

In effect yes the demand for something free is effectively un-limited then if you prefer.  Sure some ppl wont want it.  The point is putting something out for free will stimulate the demand for it. And trades and skills is the same thing as a degree, its tertiary education so that is hair splitting IMHO.

regards

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Pay for it with what? paper money printed by the trillions. Shame on you

No shortage of money for billion dollar olympic games where everything is left to rot once the games are over.

No shortage of money for wars.

No shortage of money to set up retirement centres for washed out politicians like The UN, WTO, EU, NATO, ASIAN, blah, blah, blah

Oh and their lovely pensions with perks for the family for life

 

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Huh? where does NZ have millions for wars?

Sure we have jobs for washed out pollies, I wish that was not the case.

Pensions ditto, so actually none of these are essential, yet somehoe we the voter accept such things,

shame on us.

regards

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If anyone's kids are fluent in German, it is worth keeping in mind that Germany has gone to not just no-fees for their own students, but also zero fees for overseas students.

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David,

 

"...UBS has only four of the forty stocks in their holdings as a 'sell' (Spark, Trade Me, Ryman, and SkyTV) while they have 16 rated as a 'buy.'"

 

What 16 did they rate as "buy"?

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#1 Has nothing to do with house prices, affordabily or whatever story you can come up with.

 

Plain and simple #1 is all about shifting the tax burden.

 

House prices can be easily controlled by regulating lending but lets not talk about that because it might hurt me.

 

Fixations with pensions and house prices are all about finding someone else to blame.

 

Anti bank regulators will allways behave this way so iguess we will just have put up with their winging, wineing ways.

 

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I am opposed to any from of new taxation , especially when the GOVERNMENT DOES NOT EVEN NEED THE MONEY.

We are expecting a SURPLUS by 2015 , and this is my question .

Why should a Government have a surplus when the average taxpayer does not .

Its the taxpayers money after all that is in that surplus .

If the Government does not need the money ,( then like a Company with a surplus its gives back to shareholders )  it  should be given back to the taxpayer .

 

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Surplus?

We're in debt by about 70 billion, I don't think we'll only take a year to pay that off, somehow.

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Operating "surplus" but that is then used to pay off the Govn debt, ergo its commited so no real suprplus as such.

regards

 

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#2 i saw on the overseas news last week an article which may suprise some.

 

Baby boomers comming up to retirement age do not want to retire. To keep themselves in jobs they are starting up their own businesses. They are much more successful than younger people who start a business because they have more money behind them and years of work experience.

That was on the overseas news last week.

 

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You see this in NZ now........there are heaps of retired people who work and who are in business...........

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#6 House price falls and bank security.

As i understand it if you default on your mortgage  in the US the bank forclose on your house and that is the end of your debt. Whereas in NZ a debt is a debt and must be repaid.

That must have a big impact on bank lending.

 

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#9 Student debt is a necessary step to our future and there is a reason for it.

It ties in with my theory, which i am working on. That no matter how good robots become and no matter how many jobs robots and computers do, we will allways have jobs, and we will always have to work for a living.

In 30 years from now we will still be working for a living and i will tell you what at later.

Student debt is a clue to why we have to work.

Well its my theory when i get time to put it together.

 

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..so Auckland has prices are a bubble and the share market is frothy, farmland seems a bit steep too..... so where does one invest?  Wanganui maybe??

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Pay off any debt, build a safety buffer then invest in living. Travel, study something that interests you, spend more time with family.  Money is a means to an end, it does nothing for your corpse.

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That's very easy for you to say - you've probably got sod-all money, but some of us poor souls have a big stash and don't know what to do with it.

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NZIER has no idea!!! In fact I don't know why so much notice is taken of them. Why do they try and push square pegs through round holes??

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#6 I though canadian banks were thought of as being very conservative?

 

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Re #2 Japanese demographics

It's a few years since I was last in Japan but whenever I have been, one of the things that was particularly noticable was that, there is a hudge disparity between the manufacturing/export industries and the domestic/service sector.  The former is extreemly productive and ruthlessly efficient while the latter is the opposite.  Social welfare is very limitted so it appears that they are loyal and look after each other by making work in the domestic and service sector.  So in my view, Japans population decrease can be quite easily accomodated by ramping up the productivity of the domestic ecconomy.  Long term it should not be a problem but in the interim the bulge in the dependancy ratio could cause some problems. 

The low birth rate appears to have resulted from the fact that women in Japan get a particularly raw deal.  Little or no carreer prospects ( if they are short of skilled staff they could go a long way to solving the problem by giving women equal oppertunities), in marrige the women gets a very rough deal, she may be virtually the familly  slave including looking after and doing what the husbands familly tell her to do, and to top it off the husband spends all day at work and most of the night sociallising ( that is if she even lives with her husband as it is very common for wives to live in a seperate part of the country and see her husband once a month if she is lucky (depending on your point of view))  It is therefore no wonder that many young Japanese women choose not to marry (the 'suitable' 7 year or so older men) and if they do are resistant to having children.

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Since when did you start calling bubbles David? I had to scroll up to check that all the gloomsterising was coming from you and not Bernard.

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#1 assumes 4.5%annual growth in house prices in perpetuity.

#6 says that that won't happen

 

Just curious - why the desperation to extend CGT's beyond speculative property deals if one is convinced property is about to experience huge capital losses. Seems a waste of time?

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A comment by 'driftwood' by email:

-----------------------------

#9

 

That is $3,470US for each US citizen and $2,452US for each NZ citizen.

 

But New Zealanders do not have the same income as Americans.

 

The average US citizen has a disposable income of $39,531US and the average Kiwi $21,773 US

 

http://www.oecdbetterlifeindex.org/topics/income/

 

For US: - $3,470/$39,531 = 8.8%, For NZ: - $2,452/$21,773 = 11.6%

 

8.8:11.6 New Zealand has a 32% higher student debt load than the US!

 

Then we have:-

 

 $326K US ($420K NZ) for a NZ median house and $259K US for a US median house.

 

http://www.interest.co.nz/charts/real-estate/median-price-reinz

 

http://research.stlouisfed.org/fred2/series/MSPNHSUS

 

Therefore younger people in NZ have it worse, maybe indefinitely putting off buying that house, car or having a family.

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dp

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