Australia: Land of the lie

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Cross-posted from The Idiot Tax:

If you want to a grand spectacle of over-regulation, under-regulation and bald faced lies told to a populace on a daily basis, come to Australia. You can marvel as the peeps you meet bend over and take it, or just open wide and swallow with the meekest of reactions. Humorous, given its reputation. As John Oliver recently described Australia, “Not just the country where Russell Crowe lives, but very much the Russell Crowe of countries.”

I’ll humbly brag that I was in North America recently and as I was wandering through Walmart picking up vitamins, pharmaceuticals and supplements that cost three times as much back in Australia, some requiring prescriptions, I noticed something. “Excuse me”. “Pardon me”. I wondered if these Americans were burping and farting as they passed me in the isles. No. After a while, it clicked. They were being polite and using their manners. In Australia they would have trodden on you and grunted obscenities in passing.

That kind of crude and uncivilized behaviour is common place in Australia, but it is in direct contrast to the weak kneed response the population offers when being routinely done over by the political class. Yes, the talk of a laid back Australian is true, but not the way you’d think. While that Russell Crowe act might emerge as they jam a beer glass in your face down at the pub, in contrast they’ll meekly accept a myriad of petty rules and governance that make their lives more frustrating or entrench the interests of the rent seeking class. Yet when it comes to actual required governance or protections that may prevent their journey to serfdom, the Australian government can count on its populace to be missing in action.

Looking for alternative transport to a taxi in Australia? Maybe cheaper? More convenient? Good luck.

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Uber is helping to fill the state coffers, with drivers for the ride-sharing service fined more than $1.7 million in the past 12 months. A cease and desist order has been in place on the app-based company since May last year, with transport officials slapping drivers with fines of up to $1707 for operating without authorisation. Providing a taxi service without an appropriate licence can bring a fine of $1366. In the past year, 1536 infringement notices have been issued against 538 drivers for a total value of $1,732,262. Of those, 1234 fines have been paid, reaping the state $1,415,213.

You’d think a country that so zealously protects its citizens against the evil scourge of unlicensed ride sharers would also also offer significant protections for its citizens within its red hot real estate market. Especially given international warnings like this:

The Paris-based Financial Action Task Force (FATF) on money laundering has already warned that Australian residential property is a haven for international money laundering, particularly from China. As has the Australian Transaction Reports and Analysis Centre (AUSTRAC), which warned that “laundering of illicit funds through real estate is an established money laundering method in Australia”.

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Yes, there are rules in place to ensure the Australians aren’t priced out of their own market. Foreign money is supposed to productively contribute to supply, jobs and investment by being freely able to buy and construct new properties, but being excluded from unproductively biting into the established property market. And this is being policed with an iron fist, as a survey from one of Australia’s big four banks, NAB says:

In established housing markets, however, foreign buyers were more active with their share of national demand rising to 8.6% (7.5% in Q1). Foreign buyer demand rose in VIC (11.2%), QLD (5.7%) & WA (6.8%) and was unchanged in NSW (11.2%).

According to surveyed property professionals, foreign buyers accounted for 11.4% of all established apartment sales and 9.4% of house sales in Q2. More foreign buyers were attracted to established apartment markets in all states, led by VIC (17.5%) & NSW (12.6%). Foreign buyers also had a much bigger presence in the established housing market in VIC, with a 16.1% share of total demand in this market in Q2. This was significantly higher than in NSW (10.2%), WA (5.8%) & QLD (5.3%).

These are surveyed numbers and not exactly rigorously accurate, so what does Australia’s government offer in the way of foreign investment purchases of established real estate? Surely they’d know, given they’re policing the market to ensure foreign money only contributes to supply and employment.

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Nothing. No, they don’t keep any stats. So you know where I’m going with this. While in the state of Queensland there have been 1536 prosecutions for ridesharing in the past year alone, you can guess how many prosecutions there have been anywhere in Australia for foreigners illegally buying established properties – zero.

Sure, I hear you. That’s not even a remotely similar comparison. Uber crackdowns ensure Australians needing transport are only driven by highly skilled, suitably trained and licensed operators of motor vehicles as opposed to the untrustworthy average person holding a government issued drivers license. They’re not at all about maintaining the overinflated value of a limited amount of taxi plates. So maybe something more relevant that relates to money transfers or investing.

Let’s say you want to place a bet on horse or your football team this weekend. Go right ahead.

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A TattsBet account provides a convenient and efficient way to bet via the telephone or internet. You can start your account with as little as $10 (AUD).

To establish an account you must provide sufficient identification under the Anti-Money Laundering and Counter-Terrorism Financing (AML) Act.

So you hit a 1000 to 1 shot with your $10 bet and you now want to invest in an index fund with Vanguard.

We may be required by law to disclose personal information. For instance, we may be required to provide details to:

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  • Australian Government regulators such as the Australian Securities and Investments Commission (ASIC), Australian Prudential Regulatory Authority (APRA), Australian Tax Office (ATO), Australian Transaction Reports and Analysis Centre (AUSTRAC) and to other regulatory or government entities;
  • Financial Ombudsman Service (FOS);
  • Superannuation Complaints Tribunal (SCT);
  • as required by a court order;
  • to other regulatory or governmental entities outside of Australia as may be required.

Yeah about notifying governmental entities outside Australia when collecting your distributions, please declare you’re not evading the IRS.

The Australian Government has entered into an Inter-Governmental Agreement (IGA) with the Government of the United States of America for reciprocal exchange of taxpayer information. Under the IGA, Financial Institutions operating in Australia report information to the Australian Taxation Office (ATO) rather than the US IRS. The ATO may then pass the information on to the US IRS.

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Because we’re now legally compelled to to snitch on you.

Each of the Vanguard Investor Funds is expected to be a ‘Foreign Financial Institution’ (FFI) under the IGA and Vanguard intends to comply with its FATCA obligations, as determined by Australian law implemented for the purposes of compliance with the IGA. These laws apply to all Financial Institutions offering bank or deposit accounts, investment funds, custodial accounts and certain insurance accounts in Australia.
In order for the Funds to comply with these obligations, Vanguard will collect certain information about you as necessary to verify your FATCA status.

Which brings us back to the onerous compliance Australian real estate agents must face for million dollar transactions if betting companies and fund managers are held to account for $10 bets and $10,000 sunk into an index fund. Just look at this rigorous compliance.

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Real estate agents are not subject to the provisions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

As an Australian fund manager recently said:

“What this means is that, whereas an investor of $10,000 in the [fund, name withheld], for example, has to experience the financial equivalent of a colonoscopy to prove they are who they say they are and that their money is clean, someone buying a $10 million shack in Vaucluse has to do nothing to show his money is clean, and the real estate agent, unlike the asset manager, has no liability if it isn’t,”

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Real estate is a better protected species in Australia than most of its native wildlife. After all, how else could you explain Australia’s Prime Minister, Treasurer, Finance Minister and another senior government minister repeatedly lining up to tell bald-faced lies about negative gearing. A process that incentivizes property investors to borrow nearly 100% on interest only terms to lose rental money to speculate on housing capital gains, and that lost rental money is not quarantined to the asset, it’s tax deductible against the investor’s regular income.

With rising property prices, the other hot issue, apart from foreign money, has become negatively geared investors going ballistic in major cities while first home buyers continue to disappear. Investor finance has charged skyward as the Reserve Bank has cut interest rates to record lows.

In fact, investment lending to property investors has turned into such an orgy it has actually eclipsed finance for owner occupiers.

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Year-on-year the value of owner occupier commitments has increased by 8.1% compared to a 19.4% rise in investment mortgage lending. Based on this data the proportion of total lending to investors was at a record high 41.9%. If you exclude refinances and look at just new lending, investors accounted for a record high 52.5% of all lending over the month.

It’s surely the mark of a screwed up society that first home buyers’ attempts to enter the real estate market have had to change from owning and occupying, to speculating and letting out, while living back at home with their parents or renting elsewhere.

According to Mortgage Choice’s latest Investor Survey, 36.6% of investors were first time buyers – significantly higher than the 21.1% recorded this time last year.

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Yes the speculative frenzy has encouraged the least financially experienced to now join the party with the biggest financial commitment of their lives when Australian house prices have hit record highs. And back to the government and what they’ll do to take the heat out of the incentives that have helped turbo-charge this speculative orgy since interest rates dropped. Nothing. They’ll tell lies, and even more lies, that removing negative gearing would cause even bigger problems.

Prime Minister, Tony Abbott, claimed the following to the Liberal State Council in Queensland over the weekend: “We are not going to fiddle with negative gearing. Because the last time a Labor Government fiddled with negative gearing, it destroyed the rental market in most of our major cities”…

Only that wasn’t true.

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Here’s what the 1987 Cabinet Submission on negative gearing said about rental growth (my emphasis): “Data for individual capital cities suggest that, as might be expected, rents have risen more rapidly in those cities where vacancy rates have been tightest. In the twelve months to March quarter 1987, rent increases in six of the eight capitals lagged the CPI“.

Over to the treasurer to play Pinocchio.

Mr Hockey said there was a lot of misinformation about negative gearing. There was more than double the number of people earning less than $80,000 who owned a negatively geared property than those earning more, he said. “This is a way for people on medium incomes or even lower incomes to be able to get into the property market,” Mr Hockey told 2UE radio on Thursday… “So if you were to end negative gearing, you would actually see an increase … in rents … in a number of cities,” Mr Hockey said.

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With the increase in rent lie already having been dealt with, there’s Sloppy Joe’s claim that this is a way the little guy is getting ahead. Of course the best way to con the average person into believing something is to tell them they’re the prime beneficiary of something their overlords are the truly making out like bandits from.

Tax data also show that the incidence of property investment and the incidence of geared property investment… increase with income…While the incidence of property investment increases with the level of income, the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles. These households hold nearly 80 per cent of all investor housing debt…

Along came a Finance Minister

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the truth is this has been something that has been tried before with bad consequences. If negative gearing… was removed you’d reduce the supply of rental accommodation and all other things being equal push up the cost of rents… If you look at the tax office data and you look at who actually takes advantage of negative gearing, they’re police officers, they’re nurses, they’re teachers. This is something that obviously is being used by middle-income earners to get ahead.

Yes, again, this is one for the poor renters, as it keeps rents down and it’s also for you, average citizen, we wouldn’t want to take away a luxury that you enjoy. Note the finance minister actually used the words “tax office data” to make his lies seem more believable, despite that same data directly contradicting the lies he told.

Finally, the Minister for Social Services

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In Australia, private rental accommodation is supported by a large pool of mum and dad investors making private rental stock available, through negative gearing. By number, almost 80% of these investors are middle income Australians earning $80,000 a year or less, owning just one property. They are school teachers, police officers, nurses and office workers saving and investing to provide for their financial security.

Scott Morrison finally chimed in with the “these people are doing us a favour” line, which conveniently allows the dissection of investor finance commitments highlighting they’re not doing anyone a favour. This is the most unproductive scam you can find. Virtually all the money lent to investors ploughs directly into existing housing, contributing little to supply or construction stimulus and continues to drive up prices of shelter.

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Scotty, like the previous liars, cloaks his defence of the practice in the average man being the beneficiary as he fights for his future, when, and again, the top 40% of income earners hold nearly 80% of all investor mortgage debt, according to the RBA.

There are only two exits to this story. Clearly the current government only has one defence to its senior ministers repeatedly telling easily refutable lies in public.

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And the news this week

The double-whammy of the lowest interest rates since the 1960s and an investor frenzy has seen Sydney’s median house price smash through the magic $1 million mark for the first time.

I know, I know, just to ensure the lies continue in the aftermath and the right people get to control the narrative, repeat after me… no credible economist predicted this outcome. Australians will likely shrug and accept it, then glass someone innocent down at the pub.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.