Could Lying Flat Reduce Property Prices in Australia?

It seems now that house prices in China are starting to decline. There are many reasons for this e.g. the Evergrande crisis, but another possibility is that it is caused by recently proposed property taxes in China. It also looks like these property taxes have been proposed due to the lying flat movement.

 In China, many young people are protesting excessive consumerism, competition and high house prices by "lying flat." The lying flat movement involves doing the minimum possible, that is, working just enough to afford to lie down all day.

It should be emphasised that lying flat doesn't mean not working at all. It means working the minimum to be able to afford to lie flat. This will reduce consumption, reduce demand, reduce asset prices, reduce corporate profits and reduce government tax revenue.

Many young people have embraced the lying flat movement in China. The Chinese Communist Party (CCP) has condemned this movement, even trying to censor social media posts about it.

However, there is considerable evidence that the CCP is concerned about the lying flat movement and has been introducing policies to appease the lying flat movement.

For example, the CCP has cracked down on tech firms including crypto miners and has shifted the focus from tech to manufacturing. 

The benefit of manufacturing over tech is that manufacturing is low skill and can employ much more compared to the tech sector. In the tech sector, a small proportion of the population with high education and skills are hired and paid a large salary. However, in a manufacturing economy, very large portions of the population can be hired and wages are spread out over many people. This should encourage those who would otherwise lie down into working.

Another piece of evidence that shows that the CCP is trying to appease the lying flat movement is the proposal of a new property tax. This property tax proposal has been strongly opposed by property interest groups but is likely to pass in order to appease the lying flat movement. It is believed that by taxing property, prices go down and those who would otherwise lie flat would be able to afford an apartment and feel like they have an incentive to work with the system rather than rebel against it. 

The reason why, in Australia, policies are continually implemented to raise house prices is because many people own houses. The government needs to be elected and so needs to give what voters want. Voters mostly own houses and so will demand the government increase house prices. However, if young people in Australia threaten to lie down and do the minimum e.g. work for one day of the week and spend the rest of the week literally lying down, then this threatens the economy. If enough young people lie down, the demand for housing falls, labour costs go up thereby reducing profitability, which reduces corporate profits, which reduces corporate tax revenue as well as income tax revenue. Government will have an incentive to implement policies that appease those who lie flat.

Is Renting the Key to Solving Housing Unaffordability?

I have been watching a video (see further below) that suggests that the problem with housing affordability is that there is too much focus on buying and owning property, which encourages speculation, which causes unaffordable housing. The solution should be to focus on renting. When watching this video, I think it makes a lot of sense. 

Property developers have two choices. They either build to sell or build to rent.

If they build to sell, they typically build low density housing because buyers want more land so they can engage in land speculation with the hope of making more money. However, if a developer builds and rents the property out, the buyer typically focuses on low rents, which incentivises the developer to build more high density buildings, which increases supply, which leads to lower rent.

All this can be achieved by providing more incentives (e.g. tax benefits) to private develops to create "build to rent" projects. There should be more high rise apartments, which will push down rent and reduce housing affordability problems.

It is true that buying and owning a house and owning land allows you to speculate on land, but more should be done to encourage people to speculate instead in others areas e.g. the stock market or crypto market. For example, rather than buy an $800 detached house made up of $400k house and $400k land, instead rent or buy a $400k apartment and invest in $400k worth of diversified speculative cryptos and stocks. This would improve housing affordability by moving speculative money away from land.

The video above states that one of the downsides of focusing on renting is that it can increase wealth inequality beacuse home ownership is often used to build wealth. However, as I mentioned before, the wealth is built through land ownership. If the renter also invests then in theory they shouldn't be disadvantaged. Perhaps a forced investing system for renters similar to superannuation is the answer, but I'm not sure.

Renting and Buying Crypto is Better than Buying Real Estate

Many people say that they are investing in crypto in order to be able to afford a deposit or downpayment (usually 20%) on a property. However, based on my analysis, it would be better to keep renting and investing in crypto rather than buy a house or apartment.

Historic prices

Most people use historic or past prices as a guide to future returns, so e.g. in America or Australia house prices double approximately every 10 years. See https://www.brickx.com/properties/BRW01/returns to get an idea of typical house price growth.

If you check out the global crypto market cap chart, you'll see that it multiplies by 10 approximately every 4 years. See https://coinmarketcap.com/charts/ to get an idea of crypto price growth. This means that in ten years crypto should multiply by 500.

So the assumption here is that real estate doubles every ten years but crypto 500xs every ten years.

Analysis

So let's say you have two people, a crypto investor and a property investor, and they want to live in a house that costs $1 million. In order to meet the downpayment or deposit requirements they would need to save up 20% or $200k.

So the property investors, after saving $200k, buys the house and now has $800k in debt and pays a mortgage. Assume this investor gets a 30 years loan. After 30 years, the debt is fully paid off. The house doubles every ten years, so that means after 30 years the house multiplies by 8 which means the property investor, after 30 years, has a net worth of $8 million.

However, the crypto investor, after saving $200k, rather than buy a house, continues to rent and puts the $200k into crypto. The crypto then 500xs every ten years, which means that after 10 years, the renter has $100 million net worth. After 20 years, the renter has $50 billion. After 30 years, the wealth is too much for my calculator to handle.

What this demonstrates is that it is better to rent and invest in crypto rather than buy a house.

Is it right to use historical futures to predict future returns?

Some may argue that you cannot take historic crypto prices and extrapolate them to the future, but this applies to property as well. If we cannot use historic prices as a guide for future returns then we cannot make any decision on renting vs buying. We need to make a decision, so imperfect information leading to a decision is better than no information leading to no decision.

Is property less risky than crypto?

Some argue that crypto is risky and volatile whereas property is not, but this is not true. With crypto, you can diversify easily. The $200k downpayment can be diversified across multiple coins, including stablecoins and gold-backed coins to reduce volatility. Furthermore, there is an option of dollar cost averaging that the renter has. The property investor has no such option. The property investor is all in one property in one location and is leveraged. There is also no option for dollar cost averaging. Furthermore, the price stability of property is not real. Crypto prices update every minute, which creates perceived volatility. However, if there is an auction on your property every single day, you will see price volatility. Only having an auction when you buy or sell a house and seeing only two price points and drawing a straight line between these two points is equivalalent to buying crypto ten years ago, never looking at the price, and then ten years later looking at the price.

I personally would feel safer owning BTC than real estate. You can own BTC with a seed phrase. However, when you own property, your name is on a register maintained by the government, and who knows what could happen to this register or your name on it. Furthermore, property is hard to divide. You can buy 0.0005 BTC but not 0.0005 of a house. This limits your ability to diversify or dollar cost average.

Of course, I do agree with you that crypto prices are volatile and more volatile than property. As I mentioned, crypto is expected to 500x in a decade whereas property is expected to 2x. This clearly has more volatility. However, volatility is the reason why you'd invest in property vs holding cash. Crypto is volatile, but property is also very volatile. It can double in ten years or it can halve in ten years. If you wanted no volatility, you wouldn't invest in crypto or property but rather keep your money in USD or whatever your local fiat currency is. The fact that crypto is highly divisible means you can diversify more easily and scale how much volatility you want. For example, just putting 1% of your net worth into bitcoin and the rest in cash would have outperformed the S&P500. You can scale your BTC or crypto exposure to achieve a level of volatility that suits how much risk or volatility you can stomach.

Could crypto prices go to zero?

I think if you diversify across many crypto, especially the larger cryptos (e.g. BTC, ETH, ADA, BNB, etc), it's highly unlikely it will go to zero. Diversifying across the top cryptos is a good strategy, in my opinion.

Property can go to zero. Your ownership of property comes from your name in a government register. The government could collapse or there may be a change of government, with malicious politicians coming in and seizing your property. There are many example of property disputes that resulted in people losing their home.

You can insure your house but you cannot insure cypto

Property insurance e.g. floor insurance or fire insurance, are pretty much contracts taht allow you to take a short position on property. So when there is a flood or a fire, the value of your property goes down, and the insurance company pays you to compensate. Basically, the insurance company pays you if the price goes down. The crypto equivalant is shorting the crypto or simply selling a portion of it. This reduces the degree to which you are long the asset.

Crypto as "online property"

Furthermore, crypto and property are somewhat similar. In my view, crypto is a type of "online property." You are buying online real estate when you buy crypto. The argument many give that crypto is speculation can apply to property as well. If you look for a good property that is in a good location close to a train station, etc then that is no differnet to if you look for a good crypto that has good developers, etc. It is all speculation, so you may as well make informed speculation.

Is real estate better because it is tangible?

Something being tangible doesn't make it safer or better.

A good example is if you compare property to USD. Property is tangible but USD is not, but property is a more volatile asset compared to USD.

One reason why I don't like tangible assets is because of the risk of theft. If you own a house or e.g. physical gold, someone could come and destroy your house, steal the title deed, or steal your gold. Properly stored crypto cannot be stolen. Mathematical law in cryptography ensures e.g. bitcoin cannot be stolen. However, the laws of physics enable physical gold or the title deed to property to be stolen.

Why I am bullish on crypto

When interest rates go down very low and bank interest rates go down to almost nothing (or negative) then why wouldn't someone go into crypto and earn higher interest via staking or defi? This should increase demand for crypto and increase prices.

I admit this is speculation, but this sort of speculation on supply and demand is no differnet to the speculation required when you buy property e.g. you predict how much demand there will be for the property based on its location, pedestrian traffic, etc.

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In a Propertocracy like Australia, you Should have Some Exposure to Property

Many people think Australia is a country free of corruption. Corruption is something only poor countries have. However, my hypothesis is that corruption is just as deep in developed countries. The only difference is that the corruption in developed countries is formalised into the system. The corruption is woven into the establishment, so the elite of the country own nice buildings, drive nice cars, and live in nice houses, which puts an aura of legitimacy around their dealings. Humans are naturally snobbish. We evolved that way to increase the probability of survival. Those who ally themselves with the powerful are protected from enemies. Because snobbery is a natural part of our DNA, we are more likely to believe the rich and trust their rationalisations for why their corrupt dealings are legitimate.

The attempts by government, banks and regulators to prop up the property market in the past year has exposed this corruption for all to see. We live in a propertocracy. Government depends on property for taxes. Politicians invest in property. Banks rely on property for profit. Regulators will relax standards for property. Unions need a property boom to keep their workers employed and collect funding from industry superannuation funds, with the funds under management into these industry super funds growing higher and higher as union workers continue to be employed mostly in constructiom jobs. Central banks will lower interest rates and print money to prop up property.

The entire establishment is geared towards propping up property. As such, it makes sense to have some exposure to property, but not too much. Also diversify into stocks, bonds and gold. You don't need to stop eating avocado toast or drinking almond lattes to afford an investment property. Just live with your parents or flatmates forever and never have children.

Don't Get a 30-Year Mortgage

How to loosen the mortgage noose

This article from the AFR talks about most people underestimate how much interest they end up paying when they sign up for a 30 or even 25 year mortgage.

I will not get a mortgage, not even a small one. I would rather invest in bank shares and rake in massive dividends.

The main reason why I am anti-mortgage is because I believe the modern long-term mortgage is simply a more evolved form of slavery. When you take out a mortgage, you will sign a contract so long and convoluted that you will not read it, and the terms of the contract will be in the bank's favour. If nothing goes wrong, you slave away at your job for the next three decades, living in fear of being fired and sucking up to the boss. If things go wrong, you lose your job and the bank will quickly sell your home, which can result in massive capital losses for you. Unlike in America, Australian banks can pursue you for your debts no matter what. You cannot walk away from your debts.

My recommendation is, while you are young, to live with your parents or rent and share with many people to divide the costs. Then save aggressively and buy two cheap homes in the country, one that you leave empty and the other that you rent out to produce rental income. If things go wrong in your life, you have the security of knowing you can drive into the country, live in a house, and have another house producing income to feed you.

Sacrificing sunlight for affordable housing

According to Chasing the sun among high-rises a heated issue, there is significant resistance to high-rise development in Melbourne's CBD, mainly because of fears that high-rise buildings would destroy sunlight.


Victoria is facing a massive housing affordability crisis that is  resulting in middle-class people paying exorbitant rent or massively inflated prices (and therefore interest repayments) on their homes. Giving first home owners grants only increases demand for houses and pushes house prices up even more. The answer is to increase the amount of accommodation. One way of doing this is to build outwards. Another way is to build upwards. In the face of a housing affordability crisis that is crippling this country, I am surprised that there are people more concerned about sunlight at lunchtime. Governments need to let property developers build more accommodation. Increasing supply is the only way prices will go down.

We Are All to Blame for GFC

There are some documentaries you watch that are so brilliant that you need to tell others about it. This is one of them. This documentary, part one of four, details the history of today's global financial crisis. The GFC hit in 2009 but was fixed with bailouts and other policy measures designed to provide fiscal stimulus to the economy. But now what we are witnessing is the reality that these policies have uncovered massive debt in the balance sheets of sovereign governments.

While many are quick to point their fingers to bankers, I would like to add that many of us are guilty. Many people I talk to hate bankers. They tell me over and over again how bankers are greedy and evil. However, these same people, although they talk bad about bankers, their actions reveal otherwise. These people invest their money into savings accounts with these bankers. These people borrow money from these bankers to buy houses and cars. If you don't like bankers, don't do business with them. As soon as your salary is deposited into your bank account, withdraw it and put it in under your mattress, or covert it into physical gold and bury it. But nobody does that. Modern banking has become mainstream and normal. The people who detach themselves from the banking system are seen as weird and crazy. Our actions suggest we love the banks, we trust the banks wholeheartedly, yet when things go wrong we want to blame someone else.

I do believe the major bankers are at fault for plundering the public purse when the GFC hit, but what else could the government do when so many people's money was tied up in these banks? People shouldn't have trusted these banks in the first place and shouldn't have put too much money in them.

Ultimately it was greed that led us to where we are now. It was greed from people who in partnership with banks and government tried to extract as much cash as possible from residential real estate. We had too much faith in real estate. This is a good old fashioned bubble just like the bubbles of the old days, such as tulip mania. It does not matter whether debt is transferred from banks to government to taxpayers. Regardless of where the debt goes, there are three options: (1) the debt needs to be paid off (2) the debt needs to be defaulted on, and (3) the debt needs to be inflated away with money printing. The prices of stocks and other assets will go up and down depending which the relative magnitudes of these actions. Because it is difficult to know what direction government will take with regards to how much money it will print, how much spending it will cut, etc, the best we can do to protect our wealth is to diversify.

Why I Prefer to Rent

There was a documentary on 60 Minutes this month called The Big Squeeze about families who made good incomes who borrowed incredibly large amounts of money from the bank to buy a lot of real estate. They then lived large and expected to come out ahead assuming that real estate prices always went up. Unfortunately, their dreams have now been crushed as rising prices of essentials, rising interest rates, and falling wages and even unemployment have squeezed them. The documentary asks whether it is better to rent rather than buy a home, as is the norm in Asia and Europe.

If you rent, you can live for cheaper and you can invest the difference in shares, managed funds, or property syndicates. If you buy the bank, you pay off the mortgage to the bank and hope the value of the family home rises steeply. The decision to buy or rent is quite an even match if you do the numbers, but the problem with making an economic forecast is that you are making massive assumptions over long period of time (the average mortgage lasts for about 30 years). After many of these buy vs rent calculations are done, renting and buying are normally about the same.

When you are buying a house, you are assuming many things working in your favour, namely that interest rates are low, house prices go up steeply, you keep your job and don't get a pay cut, and you live in the same place forever. This, in my opinion, is the deal breaker. Far from providing security and stability, buying a house actually locks you in and limits you. It denies you freedom to move to get a better job or to take a risk in your career. A home owership culture, in my opinion, does little in a country other than encourage wage slavery. When you get a mortgage, the bankers have you by the balls, and you stay quiet and work hard for them for the next thirty years of your life.

The benefit of renting is the flexibility. I spend about $10 per day to eat out at restaurants for lunch. If McDonald's offered to give you a $10 meal every single day for the rest of your life for a lump sum of $50,000, would you take it? I certainly wouldn't because I don't know if I will continue to like McDonald's for the rest of my life. Furthermore, if I give $50,000 to McDonald's then they have no incentive to work hard because they have all their money. They can produce poor quality food and it wouldn't matter because I have already paid the $50,000. This analogy is supposed to be similar to buying vs renting a house. If you buy a house, you lock yourself in because moving have immense costs (due to high stamp duty). Furthermore, if you buy a house, you are responsible for everything, for all the repairs and you even suffer is something goes wrong in the neighborhood that impacts the house price (e.g. if the council approves for a tip to be built next to your home). Buy renting allows you to shop around for the best product. Like the restaurants who fight over your money, lordlords will fight over your rent money.

APN AREIT Fund Yields 9%

As of 16 July 2011, the APN AREIT Fund gives a distribution yield of 9.12 per cent, paid monthly. I have been invested in the APN AREIT Fund for a little over half a year now, and I am very happy with not only the high distribution yield but also the monthly income as well as the stability of the investment income. The payout from the APN AREIT Fund is so stable and predictable that I can make plans for various spending and can reasonably rely on future APN payouts to pay off the liabilities (e.g. if I use a credit card). This predictability, high performance, and stability created by what is seemingly highly compentent active management makes me question the value of unpreditable index funds that pay quarterly distributions that are highly variable.

My hope is that as the income from my APN fund increases, I can devote more of my salary income to investments and rely on the income produced by APN to fund all my living expenses. This means that ultimately I will be able to live without working, which for me is very appealing!

Baillieu Cutting Stamp Duty by 50%

The average house in Melbourne is around A$500,000, which is among the most expensive in the world. In a bid to help first home buyers, the Baillieu government plans cut stamp duty by 50 per cent (according to First Time Buyers Struggling to Keep Up). This is clearly a bad move as it will only increase the demand for houses which will in turn increase prices even more. Those buying houses at a time like this may think they are better off with a stamp duty discount, but with house prices and mortgage interest rates at record highs, it will likely put a lot of stress on home owners. Expect banks to make more money out of this.

My advice to first home buyers is to live with your parents for longer and to pay them rent. Usually parents are willing to charge lower rent to their children because they have been living with you for decades and know that you are trustworthy tenants. With the money you save from living with parents you could take advantage of the high Australian dollar and invest in overseas companies or you could buy shares in Australian banks.

If Australians continue to want to buy houses, this will only result in more bank profits as perpetual demand for housing will result in perpetually rising house prices, which will mean home buyers will need to go into more debt to fund their purchases. Greater demand for debt will mean that banks are able to charge higher prices for mortgages. They can increase interest rates or charge higher fees. This should lead to greater profits, all else equal, will lead to greater shareholder return.

If you want to invest in an Australian bank, I recommend one of the big four: Commonwealth Bank, Westpac, ANZ, or NAB.

The Problems with High House Prices

The average house in Australia is now around $500,000. It wasn't always this expensive. Back in the old days, houses were cheap, but since then an explosion in house prices has occured, driven by increasing willingness and ability by banks to lend money as well as great enthusiasm by bank customers about the wisdom of investing in real estate.

In Australia, investors who borrow money and then lose money if interest repayments are greater than rental income, can use this loss to reduce their taxable income, thereby reducing their tax burden. This tax advantage has increased demand from investors to borrow money to invest in real estate.

This tax advantage will be difficult to do away with as it is political suicide. An attempt by Labor to abolish negative gearing led to so much controversy that politicians nowadays are likely unwilling to try it again. I believe it is best to assume that negative gearing is here to stay and to find ways to deal with it.

The effect of higher house prices can be positive or negative depending on who you ask. For those who own residential real estate, it is brilliant. For those who do not have real estate and want real estate, it is very bad. I am in the bad group in that I do not own residential real estate. However, unlike many young people in my predicament, I do not have a desire to ever buy residential real estate in Australia. The reason why I don't want to buy real estate in Australia is because it is too expensive. The tax advantage has already been capitalized into prices by driving it up. Therefore, if you buy a house you overpay. Many believe paying a lot for a house is harmless but it is extremely harmful. If you borrow more to pay more for a house, you lose money via interest you pay to the bank. If you use cash to pay for a house that you live in, you lose money because of the opportunity cost since you could have used that money to earn interest. If you overpay for an investment home, overprices housing means that you lose money because the interest repayments you make are not compensated for adequated by rental income. Mainly due to tax advantage being capitalized into house prices, rental yields for the average house in Australia is around 4 per cent, and this does not take into consideration the costs of depreciation and repairs.

The bottom line is as follows: if you buy a house, you're being ripped off. The windfall from the housing boom has already been taken by the baby boomers. Generation Y should not try to mimick the baby boomers as the situation back then is nothing like the situation now. Back in the old days, houses were cheap and if you rented your house out you could collect high rents. Nowadays, houses are expensive and if you rent your house out you will not get much back.

Even if you agree that house prices are too high and refuse to buy a house, that does not stop you from being ripped off. High costs of real estate may even extend to commercial and industrial real estate, resulting in the prices of goods rising. This is particularly evident if you traval and notice that everything in Australia is much more expensive than it is in other countries, not just houses. Therefore, if you don't want to be ripped off, the best thing to do is to reduce your spending.

I recommend you keep your spending low, live with your parents (or rent but split the rent with many roommates), and save up money mainly using the highly tax-advantaged superannuation system as well as taking advantage of high private debt levels by investing in bank shares. I am strongly considering moving out of Australia once my savings are high enough. I will get a new job in a new country and live there instead.

AREIT Funds - Vanguard vs APN

It is my opinion that a great investing opportunity exists in AREITs, so I plan to start investing in AREITs.

I have just been looking at Lonsec's Australian Property Securities Funds Sector Review 2010, which interestingly is found on Vanguard's website and highly recommends Vanguard's AREIT fund, which predicatbly tracks the S&P/ASX 300 A-REIT Accumulation Index.

Strangely, Lonsec's study recommend's Vanguard's fund over the APN AREIT Fund, which is find startling given that my prima facie examination suggests that APN's fund seems superior.

One of the reasons for this, according to Lonsec, is that Vanguard, which employs passive management, offers low fees compared to those funds that employ active management: Page 7 of Lonsec's review states the following: "[A] majority of funds are still charging relatively high fees for low conviction 'active management'. This is disappointing, given that most managers hold over a third of their portfolios in the Westfield Group.... To this end, Vanguard has retained its 'Highly Recommended' rating. This rating reflects Lonsec‘s confidence in Vanguard, should advisers choose to invest in a low-cost, index fund in this asset class."

However, Vanguard's management fees that it charges for its managed fund (0.90% per annum for the first $50,000 invested) is much higher than the fees it charges for its AREIT ETF (0.34% per annum). Furthermore, APN AREIT Fund's management fees are even lower than Vanguard's (0.85% per annum where no adviser remuneration is paid) (Source, APN AREIT Fund PDS, p. 1). To top it off, Vanguard's fund pays distributions half yearly whereas the APN fund pays distributions monthly. As of 2 December 2010, the APN AREIT Fund's current yield is running at a phenomenal annualized rate of 9 per cent!
 
One of the supposes strengths of Vanguard's AREIT fund is the fact that it tracks an index. But as Lonsec pointed out in its report, this AREIT index is about 40 per cent made up of the Westfield Group. Why pay Vanguard 0.90% per year in management fees to essentially invest in Westfield? There is little diversification. APN, however, are "index unaware," which means they are not constrained by having to follow some index. This allows them to seek out value, maximize diversification, and minimize risk -- and they do all this with lower management fees.
 
I am not saying I don't like Vanguard. I believe they offer a good diversified bond fund. I am also invested in their high yield fund, although I am not satisfied with this investment as it claims to pay monthly distributions but in actual fact seems to pay zero distributions every third month. Quick calculations of the last few years of distributions received reveals that Vanguard's high yield fund only gives a running yield of about 4 or 5 per cent per annum, which is quite disappointing for a fund that is described as "high yield." This may not be the fault of the fund manager and can be blamed on market conditions, but nevertheless it certainly is disappointing for investors.

Differences Between Gold and Real Estate

One of the benefits of investing in gold is that it protects against inflation. One cause of inflation is a rise in the money supply, which can be caused by money printing by the government. Money printing is very tempting for governments because it gives politicians more money to spend without actually increasing taxes. Even though printing money runs the risk of increasing prices, it's a more subtle way of raising revenue rather than directly taxing people. Printing money also devalues the currency, making exports more attractive.

Gold cannot be printed, so it is much more difficult for the supply of gold to increase. Gold can be mined from the ground, but obviously this is not as simple as printing money.

Some people suggest that real estate is a good investment that can keep up with inflation and has similar safe haven properties as gold. They argue that in times of hardship, you can grow food on your land. Furthermore, land cannot be printed. There is a finite supply.

It is true that you can grow food on land, but there being a finite supply is hardly helpful. The major problem with land is that governments have too much control over it. Physical gold is difficult to tax. It is almost pointless for government to tax gold because people tend to buy physical gold and trade among themselves, leaving no paper trail. Gold is portable and can be easily stored and hidden. Land, on the other hand, is not portable. It cannot be smuggled out of the country. You cannot hide it from the government. The result is massive taxation. The reason why banks are very happy to lend to home buyers is because they know that if they lend to you, they have you by the balls. You cannot run off to another country if you cannot pay your debt. The bank can easily sieze your land and sell it. Gold is different. If you borrow money from the bank to buy gold, you could easily run off to another country with the gold. Gold is freedom. Real estate is slavery.

If government were to slap a tax on gold, people would simply move it out of the country or just do informal transactions. If government were to slap a tax on land, people cannot do anything about it but to accept it. Just as government can print money, government can also print land. Not literally! For example, the government can control the amount of land released for residiential development by altering the urban growth boundary. If government wants to keep land prices higher to collect more land tax or land transfer duties, it can limit the supply of land. If government wants to help out property developers, it can increase the supply of land.

In an end-of-the-world scenario, when banks collapse and civilization as we know it is finished, land ownership will be worth nothing because the land you own is land you own thanks to a piece of paper enforced by the judiciary. If civilization breaks down, it is assumed that the judiciary has no power and hence your land is gone. Even though you may live on it, it's not really yours. Gold is different. Physical gold is held by you and hidden by you. Since you control it and since you own it by force or threat of force, then it is yours, regardless of what a Supreme Court judge says.

Aurora Property Buy-Write Income Trust

The Aurora Property Buy-Write Income Trust (ASX: AUP) is currently yielding about 10% per annum, which is very high. It achieves this by buying listed Australian real estate trusts and then selling call options on these securities to earn extra income. A portion of the income it earns from selling these securities are then used to buy put options for protection against price falls. This is a strategy that I am definitely unfamiliar with. Regardless of the strategy, the fund pays very attractive dividends. This is something I will strongly consider, even though this fund seems to have very high fees. It may be worth it consider the attractive dividends. It's worth a try.

Aurora Funds Management has a number of other investments, such as funds that employ a technique of dividend stripping on Australian equities, a fund that employs the buy-write strategy to global infrastructure, and a hedge fund called Van Eyk Alternatives Plus whose performance has been underwhelming, and a brief skim of this hedge fund's PDS reveals things like commissions for financial advisors. Most impressive of all, Aurora Funds Management has a fund (ASX: ABW) that pays 8.4 per cent and has been able to track the ASX200. It is able to track the ASX200 by using future contracts and other derivatives. An investment that tracks the ASX200 and pays dividends of 8.4 per cent is very impressive. Given that the ASX200 has average about 8 per cent over the long run and given that this fund's yield is 8 per cent, you are looking at potentially 16 per cent total return for this fund.

Below are Aurora funds listed on the ASX with their estimated yield (estimated by CommSec).

ASX Ticker	Estimated Yield (%)
AOD	6.2
ABW	8.4
AUP	10.0
AIB	8.4
VBP	4.6

Like I said, I will consider these, but I do not like the high fees, and I'm not sure if I get any currency diversification. Aurora's funds, its investment strategy, and so forth have a Bernard Madoff feel to it, so some more reading would be necessary before I jump in. The great thing about these listed investments is that you can put a few thousand dollars in and if you are dissatisfied with the fund's performance (e.g. it pays low dividends) then you can simply stop putting more money in. If you feel like the performance is good you can put money in as you go. This control that I get from investing in listed securities is why I am pro-shares and anti-real estate. (When I talk about real estate I am talking about homes, not A-REITs.) If you buy a home, you are all in. The average house in Melbourne costs $500,000. If you decide to buy a house you borrow maybe $450,000 and then you are a slave to the bank for the rest of your life. You work like a slave to pay the mortgage and then when the banks raise interest rates you complain and complain. This is the typical behaviour of that breed of Australian known as the Aussie battler. As you can see I am passionately anti-debt, but that is not the main focus on this blog post, so I will hold my tongue. I have a tendency to drift to unrealted topics. The rant about the Aussie battler will have to wait until later.

Estimated Yield of iShares S&P Global 100

I am keen on producing high yields from my investments. Due to the strong Australian dollar, I have recently purchased on iShares S&P Global 100 ETFs (ASX: IOO). According to the iShares website, this ETF's distribution yield is estimated to be around 9.5 per cent, which seems very high. However, when I actually did the numbers myself using data on the ETF's actual distribution history, I noticed that the yield is more like 2 to 3 per cent. I am not saying iShares has misled anyone. On their site they clearly state that their figure is an estimate with various assumptions. Clearly iShares's assumptions were different to mine. I suspect that the main difference is that I took all the historical distributions from about three years back and then divided it by the current price. Perhaps iShares took the historical distributions and then divided it by a weighted average. Perhaps they also accounted for exchange rate fluctuations between the US dollar and the Australian dollar. It would make sense that this ETF would give low yields if you consider that currently the Australian dollar is strong and has been appreciating against the US dollar for a while now. If the Australian dollar were to suddenly pull back for whatever reason (e.g. American money printing actually turns out to be a valid plan that strengthens corporate America and and the US dollar with it) then I should expect yields on IOO to increase.

I am in a little bit of a dilemma because on one hand I want high yields but on the other hand I want to hedge against a collapse of the Australian dollar. I can hedge against a collapse of the Australian dollar if I buy US dollar denominated assets, but the problem is that as the US dollar weakens then my income from dividends gradually falls because the dividends are originally paid in US dollars and then is converted to Australian dollars. As the US dollar gets weaker, so too does the value of these dividends.

Benefits of Brumby's Expansion of Melbourne

Today the Victorian parliament voted to extend Melbourne's urban growth boundaries (read Green Land Cut Back as Melbourne Grows Much Bigger). When I read this news, I thought to myseld, "Brilliant! Great idea. Houses are very expensive in Melbourne, and making Melbourne bigger would make it easier for first-home buyers to afford houses."

But reading the comments in the Age news article I linked to above, it would seem as if Premier Brumby had just been caught sexually abusing a child. Why are so many people whinging about an extention to the urban growth boundaries?

I don't pretend to know exactly what the Victorian government intends to do when implementing this policy, but based on what little I have read, everything seems positive.

Wouldn't it increase congestion because more people will have to travel to the city?

According to the news article, suburbs like Footscray, Broadmeadows, Frankston, and Dandenong will be "designated business districts." WIth the expansion of Melbourne's urban growth boundaries there will, I hope, be more commercial and industrial zones outside of Melbourne's CBD. Once many residents are established in the outer suburbs, many businesses that are headquartered in the CBD will feel great monetary pressure to relocate from the CBD to new business districts like Frankston and Dandenong where they will be close to many new outer-suburban citizens and where rent would be cheaper. Lower rent means higher profitability.

Suppose very many workers still travel to the city rather than outer-suburban business districts. If that is the case, the cost in terms of congestion, time, and petrol for workers to travel to work is high, and these workers will demand a higher wage from employers to compensate, which means businesses based on the CBD will need to increases wages. If these businesse move to Dandenong or Frankston, congestion would not a big issue.

Basically, work moves with the people. If people move away from the city, so too businesses will move away from the city to follow the source of labor.

A larger Melbourne will create social division because rich people will live near the city while poor people will live in the outer suburbs.

This is already happening. Rich people in Melbourne already live near the city while poor people live far from the city. Even if Melbourne does not grow geographically, it wouldn't fix this problem. In fact, it would make things worse. If Melbourne did not expand, and if we assume demand for housing remains high, house prices would be high everywhere, even in the outer suburbs. At least if we expand Melbourne we increase the number of houses in the market, which pushes house prices down, giving the poor an opportunity to afford to put a roof over their heads.

If the government expands Melbourne and also increases the amount of commercial and industrial zoning in the outer suburbs, this should make living in the outer suburbs more attractive since it those who work there can more easily travel to work.

What about the green wedges?

Most of the green wedges in Melbourne are actually just garbage tips and farms. It makes no sense to have these things in the city. An argument can be mounted that urban sprawl will harm the environment by clearing forest and increase carbon emissions, but both these problems can be fixed with either taxation or cap and trade. To prevent deforestation or carbon emissions, tax it heavily or sell off permits to individuals or companies to allow deforestation or carbon emissions. This way the government can set how much deforestation or carbon emissions it wants. If citizens or government decide that deforestation or carbon emission is a problem it can increase taxes on deforestation or sell off very few carbon pollution permits. This makes urban expansion very costly for property developers or individuals to buy new land, which makes high-rise apartments more economical.

What about the extra traffic?

Extending the urban growth boundary will allow for the construction not only of houses but also roads and train tracks. Because more roads are built, congestion should not really increase. If very many roads are built relative to houses and businesses, we should actually see a net reduction in traffic congestion.

Real Estate Spread Betting

Now that the FIFA World Cup 2010 is underway, there are many betting ads, e.g. from Sportsbet. In the recent Germany vs Australia game, if you think that Germany will win you can put your money where your mouth is and bet on Germany to win.

Wouldn't it be a great idea if you can do the same thing with Australian house prices? Gambling company should allow punters to bet on whether they think house prices will go up or down.

As it turns out, house price spread betting already exists in the UK, as I have discovered in an article in the Times Online about spread betting: "So, is it possible to make money out of property without the boring necessity of actually buying a house, paying stamp duty or dealing with oleaginous estate agents? The answer is yes: by betting on the movements of the British housing market. Spread betting, as it is known, has proved fabulously lucrative for players such as Simon Smith, 33, who makes rather a good living by sitting in his office in Leeds working out what is going to happen to house prices — and placing his money accordingly."

According to the Times article, many home owners are using house price spread betting to hedge against a fall in house prices. On the other side of the equation, renters can use house price spread betting to hedge agaisnt a rise in house prices, so there is a market both ways.

Further Googling has revealed that you can engage in house price spread betting on UK house prices via IG Index. I am not sure whether this site allows Australians to sign up. I am also unsure about the taxation implications of spread betting.

Double Dip Recession and the Housing Crisis

The future is very uncertain. I have lately become increasingly worried about the economy, mainly worrying about the possibility of a double dip recession or a house price crash (or both).

I will first talk about the possibility of a double dip recession, which I think may be likely to happen because the miraculous recovery we have seen lately in the world economy may be the product of government stimulus, which involves nothing but the movement of money. Moving money around from the people to the government and then back to the people doesn't actually do anything. If governments around the world go into debt trying to stimulate their economies, these debts will have to be paid back in the future, which means governments will have to increase taxes, which stifles economic growth. (Imagine if income tax increased to 70% to pay for government debt. Would anyone bother working?) There are also worries that the Chinese economy may be overheating. I happen to think that much of Chinese economic growth is real because, based on my understanding, Chinese competitive advantage is in cheap labor, which is a real form of productivity enhancement. If you can halve your labor costs, that makes a real and significant difference to profitability. However, even is China is genuinely growing, perhaps investors have been too enthusiastic, which is why I am worried.

Based on the previous Great Recession and credit crunch, only one or two years ago, stocks are the worst place to invest. Stock markets all over the world went down peak to trough by about 50 per cent on average. The safest place to be was in cash or bonds. Since my portfolio is currently 77 per cent stocks, I think it's time to start buying more bonds!

A credit crunch results in falling asset price values as people with massive debt need to sell off assets to raise cash to pay off their debts. This is why we saw during the Great Recession prices of stocks and property fall and why cash was king. This occurs when private debt is high. But what happens when government debt is high? One worry is that private debt can be absorbed by the government, e.g. with bailouts. Citizens can go into massive debt and a credit crunch hits. Government can respond by stimulating the economy by giving money to people, which helps them pay off their debts. The problem is that government itself goes into debt. One way to fix this is to tax heavily, which retards future economy growth. If you think this is likely, going into cash and bonds is safest. However, some people suggest that government pays of its debts by printing money, which is quite dubious but not entirely unbelieveable. This will reduce the value of cash and bonds, leading to inflation, which increases stock, property, and especially gold prices. In my opinion, the threat of inflation is best countered with hard assets like land, resource stocks, and precious metals. Land and precious metals are very expensive now and perhaps overvalued. Resource stocks are historically cheap but buying resource stocks is not necessarily the same as buying the resource itself. E.g. buying shares in a gold mining company is not the same as buying actualy gold since the value of the gold mining company depends on many factors other than the price of gold. However, this is something I'm willing to risk. I have no physical precious metals or land. Approximately 30 per cent of the ASX200 is made up of resource companies, so investing in Australian shares I hope provides partial protection against the possibility of inflation. If you want to be fully invested in resource stocks, there is a new ETF now listed on the ASX with ticker symbol RSR, which invests in all the resource companies in the ASX200.

Another issue that needs to be addressed are house prices in Australia. House prices here are very expensive. If house prices plunge, many governments may be unwilling to lend to Australians, which can cause the Australian dollar to plunge. This won't necessarily be a problem for Aussie miners like BHP whose products become cheaper for overseas buyers if the Aussie dollar depreciates. Hence I think a good way to hedge against a plunge in Australian house prices is to once again go into resource stocks, so buy RSR! But suppose house prices do not plunge. Suppose they continue to go up or stay where they are for a long time. I think that if this happens then private debt levels will be huge because higher real estate prices mean buyers need to go into massive debt in order to afford their dream homes. More mortgage debt means more profit for the banks. The banks in Australia with the greatest exposure to mortgages are the Commonwealth Bank and Westpac. The big banks are the biggest winners from a property price rise. Many landlords think they are screwing renters because renters are throwing money at them. Landlords are indeed screwing renters but banks are screwing landlords. Unless the landlord buys out the house outright with cash (which is rare) then the landlord will pay a large portion of their rental revenue to the banks. In fact, many landlords love to negatively gear their property, which effectively results in a transfer of money from taxpayers to the big banks. It is highly unfair system with the big banks at the top, but the big banks in Australia are public companies, so anyone can become shareholders. If you think house prices will boom, I think investing directly in the banks or buying a financial-sector ETF like FIN is the way to go. Since the ASX200 is about 40% financials, 30% resources, and 30% other sectors, I happen to think that buying an ETF that invests in the broad Aussie stock market (e.g. STW or VAS) prepares you for both a house price crash and a house price boom. You're covered either way.

To wrap it all up, I am worried about a double dip recession, but because I think the government will try to avoid a double dip recession by artificially creating a boom, it is a good idea to bias your portfolio a little bit towards stocks rather than bonds and cash, and if you are comfortable then adding precious metals is a good idea (ETPMPM on the ASX buys a mixture of gold, silver, platinum, and palladium).

I am not entirely sure where the economy is heading. I recommend that people be skeptical about people who claim to be able to predict the economy. I prefer to think about the possible problems and then work on trying to preserve purchasing power based on possible future problems.

The Stigma of Living with Parents

I was browsing through Yahoo! and stumbled upon something in Yahoo! Answers about a 28-year-old guy who lives with his parents and is annoyed at all the criticism he gets from other people.

The criticism this person gets reminds me of me. I too am a male who lives with my parents and many people criticize me. I remember last week I was talking to a bunch of friends about the Melbourne property market. My friends were all desperate to save up to buy a house. One was renting and the other two were living with their parents as well. Anyway, one of them said, "I plan to live with my parents for about two or three more years so that I can save for a deposit for a home, and then I will buy. Paying rent is a waste because you get no asset at the end. If you get a mortgage you get an asset at the end."

I actually think my friend is wrong because when you rent a house you pay less than if you borrow money to buy a house. If you took an interest-only loan from a bank then the mortgage repayments you make will be approximately equal to rent you would have paid for the house.

I told my friends that I personally do not plan to buy a house because I fear that Melbourne house prices are too expensive. Median house prices in Melbourne are around $500,000 now, so if I get an average house I would need to go into massive debt. The thought of paying off massive debt for the next few decades of my life is not appealing to me. I actually think the best move for me to make is to simply live with my parents and with the money I save I can invest. If I think house prices will continue to go up then I can invest in companies that are likely to profit from rising house prices, e.g. Commonwealth Bank and Stockland.

Even though my friend (let's call him Clive) is actually living with his parents at the moment, he then decided to criticize me. He said, "Oh, so you're just going to leech off your parents! How shameful!"

My response was as follows: "I am not a parasite. Every month I estimate my cost and then pay it to them plus a little extra."

Clive then claimed that I didn't pay enough because I was not paying the "market rate." He believes that if I don't pay the current rental rate, which is about $200 per week, then I am not paying enough. I currently pay around $200 per month, which is about $50 per week. Clive believes that because my parents could get $200 per week from renting out my room to someone else but are instead getting $50 from me, they are making a loss from having me in the house and therefore I am not compensating them enough.

This argument is actually wrong, mainly because Clive did not have enough information. One piece of information Clive didn't know about was that my parents are apprehensive about renting out rooms in their house to strangers (understandably). My brother used to live with the family but now he does not. His bed is empty and my parents have not rented out the room to others. If my parents did rent out my brother's room to others, they could potentially earn $200 per week, but they choose not to, and I think the reason why they choose not to is because it is uncomfortable sharing a family home--a very private and intimate place--with a complete stranger. I have spoken to my parents about moving out and I have told them that if they want me out them I can leave. They have no obligation to keep me if they didn't want to. They encouraged me to live with them for as long as I wanted to, and they cited the monetary benefits of doing so. I also asked my parents if they would rent my room out if I left and they said they would not the reasons I have previously given.

If I leave the family home, my parents get nothing. Their payoff is zero. If I stay in the family home, it is true that I use up electricity, gas, and so forth. However, I transfer cash to my parents every month. If I estimate that my cost in electricity, gas, and so forth is $150 per month then I pay that. Then I pay a little extra, say $20 per month. The net effect is that my living with my parents results in my parents making a profit of $20 per month, which is higher than the zero payoff that they would get if I did not living with them. Hence from cost-benefit analysis it is beneficial for my parents to keep me. My living with my parents benefits not only my parents but also me since I do not pay exhorbitant rental rates nor do I destroy my financial stability by imposing a massive debt burden on my future self. The arrangement is mutually beneficial.

I understand that there is social stigma if a male lives with his parents, but I am willing to face that. The guy at Yahoo! Answers who is in a similar position to me wonders why so many women do not like men who live with their parents. I personally think that a woman has the right to assess a man using whatever criteria she wants. But I think that many of the arguments that many women made on Yahoo! Answers is not quite right. I will address them below.

A female named Laraby9 said the following:

The fact that you don't cook your own food and you don't do your own laundry makes you seem infantile, I don't care how many degrees you have. To most of us, the goal in life is to be independent. When a woman comes across a man who has no desire to be independent or standing on his own two feet, it is a HUGE turnoff, and it makes the man seem weak and unable to cut the umbilical cord. It makes the man seem like he has no interest in being an adult. That is a big turnoff for most girls who are looking for that strong man to help them start and raise a family with. If you are truly proud of the way you are living, then why are you here defending yourself?

I am defending myself on this blog. The issue of living with my parents is one that I have thought about over a long period of time. Am I proud of my decision? The first question to ask is what is pride? Pride is something you feel when you feel that you are important and worthy or respect. This is vague because when I decide to live with my parents I do not aim to respect myself or to make others respect me, nor do I try to somehow try to feel important or make others think that I am important. The decision to live with parents was based on an assessment of cost, benefits, and risks. Writing about my decision on a blog helps me to articulate my thoughts, which allows me to explore it further. Even though I have decided to live with my parents, I cannot be sure that I decision is correct. Based on my analysis so far, living with parents seems to be the best move, but I may be a victim of lack of information or even cognitive biases. By writing about the issue, thinking about it, and talking about it--all with an open mind--I learn about it more, which helps me make better decisions. There is also an altruistic aspect to it as well. By writing about the issue, I inform other people who may be in a similar situation to me. I give them ideas that they can use to make decisions for themselves.

Another argument this female made was that a man who lives with his parents is not independent and therefore cannot survive. His inability to survive is bad because as a female she wants the male to help her survive. If there is one topic that I am passionate about, it is survival. Based on my research, I know that pure independence is difficult, if not impossible for an individual to achieve. To be independent you must live out in the country all by yourself and grow your own food. This is difficult because getting a balanced diet requires you to have Noah's ark on your farm. You'd need to raise cows, chicken, pigs, and fish. You'd need to grow many different types of vegetables and fruits. You'd have to prepare the soil, sow the seeds, water them, and then wait, and you'd have to hope that the weather is good otherwise your food will not grow. It is extremely difficult to be fully independent. That is why humans tend to specialize and trade with others. Instead of trying to grow all kinds of fruits and vegetables in your farm, you can focus on one, say, rice. Then you go to your neighbour and engage in a barter exchange, say, exchange your excess rice for his excess avocados. Through specialization and trade, we make things easier for ourselves. Even if I leave my parents, I will not be fully independent. Even if I cook my own food, I do not grow my own food. I buy basic ingredients from the supermarket. Hence I am dependent on that supermarket. I am dependent on the farmer to grows the basic ingredient. My point is that dependency or interdependency does not necessarily reduce your ability to survive. Rather, interdependency increases your ability to survive by allowing your to exploit the gains of trade to produce greater payoffs for both parties. When you go to work, you are dependent on your employer to pay you a salary and your employer is dependent on you for you services to the organization. There is mutual dependency. My living with my parents is just another form of trade. My parents are dependent on me for my cash (and also my presence, I hope) and I am dependent on them for accomodation. If I were to move out and rent, I would be dependent on the landlord. If I moved out and took out a mortage to buy a house, I would be dependent on the bank for the loan. No matter what I do, I am not fully independent.

Furthermore, the argument here is that a man who lives with his parents cannot survive. This is false, I think. If a man moves out of home and is put into a property market with very high prices, he either pays high rent or goes into immense debt to buy a house. Either way, he loses a lot of money, either in the form of rent or interest. If he loses a lot of money, his ability to be independent and his ability to survive decreases. By living with my parents, I save a lot of money, and the accumulation of saving increases independence.

I will use a numerical example to illustrate my point. Assume that investments produce 5 per cent return. Assume that you only need $5000 per year to cover the cost of food. Assume that by living with parents you are able to save $2000 per month ($24,000 per year). After 4.27 years of living with your parents, you will have $100,000 saved up, which will produce $5000 per year in investment income, which covers your food costs. You are dependent on your parents and your employer for 4.27 years after which you are independent because the most important necessity has been covered. Now assume that rent is $200 per week ($10,400 per year). If you move out, you can save only $13,600 per year rather than $24,000. This means it takes 7.35 years of dependency to your employer for you to be financially independent. Living with your parents allows you to be financially independent faster. Remember that the definition of financial independence is that the cost of necessities is covered by passive investment income.

I know I have gone on about this issue for a long time, but let me also address one more issue. Another friend of mine--let's call him Frank--told me that it is important for me to move out because it is important for me to find a female and start a family. I asked him why this is important and Frank told me that pooling my money with my partner's money means that I need a smaller deposit to buy a house. He also claims that living with a partner allows you to gain economies of scale e.g. with air conditioning bills. That is, per person the power bills are lower if two people live together than if one person lived alone. But just because there can be economies of scale if one person decides to live with two people, it doesn't mean I should leave my parents' house. In fact, living with parents gives even greater economies of scale because even more people live in the same house. The idea that moving out and getting a partner is important because it makes it easier to buy real estate seems to assume that buying real estate is something you must do. It is not. If Frank's argument is that real estate is a necessity because you need shelter from the cold, then living with your parents fixes that problem. If Frank's argument is that real estate is a good investment and you should get into it quickly by investing jointly with a partner, then a better idea is to invest through a property syndicate. Many property development companies have property syndicates that allow you to pool money with other investors to invest in real estate. Better yet, why not just invest in a mutual fund, which also pools money but to a massive extent?