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Investment News and Views, Direct from Our Team.

Some ideas on how to fix Australia

Australia faces some of our darkest years in the very near future. Our household debt is the highest in the world. We have the greatest reliance on China of any western nation going into a Chinese debt crisis.

 

The current government and opposition are as useless as a one legged man in an ass kicking competition. They are looking solely at the next month of political point scoring and have no policies to tackle the coming crisis from the largest debt bubbles in the world, ours and China’s.

 

At Valor, we are positioned so that we will make considerable gains from a very difficult economic situation in Australia in the coming years. We hope it doesn’t get as bad as we think it might for the sake of many of our family and friends who are not positioned correctly, however our clients are set to capitilise on this coming crisis.

 

There are a few actions that the newly elected government can do to lessen the blow of what is coming. We are realists and with Malcolm Turnbull selling his soul to the right end of the Liberal party to become leader means will do none of the following. Bill Shorten has also shown no sign that he has any inkling of how to manage Australia’s coming crisis.

 

There needs to be a political party established that has no agenda other than to make rational decisions for the greater good over a very long term period. If we could dream up this theoretical party and structure it correctly, it would consist of leaders with real life experience who have not compromised their morals to get to the political position they have achieved. Malcolm Turnbull initially showed promise in this department, however has obviously been muzzled by the party.

 

Lets call this fanciful party the “rational party”. They are not beholden to powerful bodies such as the property council or the unions. They simply act in a manner that is rational. This does not exist in politics. There is no one in any position of influence who is not themselves under the influence. Some of the independent senators have made fewer compromises, however they are not in a position to drive policy, rather they can only vote to influence the balance of power.

 

What could the rational party suggest as a way to fix our formerly great country:

 

  1. Tax empty houses
  2. Infrastructure
  3. Make the home part of pension asset test
  4. Ban borrowing in Super
  5. Ban negative gearing that doesn’t become positively geared within 3 years.
  6. Re-capitalise banks before the crash
  7. Build a capital based society and encourage innovation (currently rent seeking asset based society)

 

(This list is not exhaustive and is just a few ideas that would put us on a more sustainable path)

 

  1. Tax empty houses. Drive through Zetland in Sydney or Docklands in Melbourne at 8pm on a Monday night and you will see a very large proportion of the apartments with no lights on. There is a wide range of estimates of how many apartments are empty, however a simple vacancy tax will fix any housing issues in Australia. The mayor of Vancouver recently announced this very rational measure. Why should an Australian working class family, who is doing all the right things, be put in a compromising position of enormous debt or inability to buy a house simply because we allow foreign buyers to launder their money through our property market. Their dirty money sits in apartments and houses that are left vacant, wasting resources in our country. It is simply immoral and easily fixed. Increasing taxes on all property would also be rational, as it would reduce speculation.

 

 

  1. Infrastructure is horribly lacking in the entirety of Australia. Whilst Melbourne may have a superior tram system that is better than most, it is still far behind the wonderful networks of the worlds truly great cities such as London, Paris, New York, Hong Kong, Singapore and Tokyo. A congestion tax such as in London would be wise to discourage single drivers entering the city causing inefficient usage of roads. This congestion tax must be implemented along side a significant increase in public transport.

 

 

  1. There are multi millionaires in Australia who are receiving the full pension. This is insane. Hard working Australians are paying for the rich peoples retirement, simply because that person put all their money into a house rather than superannuation. There are even a number of Australians who are wasting their super as fast as possible to get the full pension. Some of these people live in $2 million to $10 million dollar houses! A simple fix is to have the family home counted in the assets test. If someone wants to stay in the home, that is their prerogative, however it is a choice that they must pay for if they have the ability to. A struggling nurse or policeman who works all night just to pay tax so that these multimillionaires can life comfortably in their mansions is just not fair. If these rich 1%ers want the pension and to stay in their house, the government can have the pension deducted against their home as a growing debt owed to the government. On death, the government sells the house and any remaining asset value becomes part of the estate. This way essential members of society such as teachers, nurses or policemen are not working to pay tax for another person’s extreme wealth.

 

  1. Borrowing inside super is just dumb. Those that are leveraged into housing for the coming crash are going to wipe out their retirement assets and be a burden on society. This should not be allowed. Their greed will be your increased taxes to pay for their folly. There are also some who are leveraging into banks using warrants. This should also be banned. There should be no leverage in retirement assets because when the tide goes out, those that were greedy become dependent on those that were cautious. This is just not fair.

 

  1. There should be no tax deductions for investing in property for any period beyond 3 years. There is a rough 3-year test for businesses to become profitable before the ATO deems a business a hobby, so why shouldn’t this apply to property. Anyone who is putting money into property with the current rental yields is likely to have rental losses for a decade. This is tax evasion! This is illegal, yet currently not being enforced because “everyone is doing it”. Why should the rest of society pay for a speculator who never intends to make an income profit in any meaningful time frame? Capital gains are not considered an income profit. The current tax code makes it clear that it is tax avoidance if you never intend on making an income profit from an investment and attempt to claim losses against your personal income. This needs to be enforced with a very strict 3-year rule. This 3-year rule would be a better outcome than the current proposal by Labor to completely ban negative gearing over 10 years.

 

  1. The Australian banks, at first glance, look ok with their capital ratios when compared to the rest of the world. The only problem is that these capital ratios require assets to be fairly valued. A house in Atlanta for $100,00 is probably at or below fair value. A house in Blacktown for $1,000,000 is probably a very long way from what could be considered fair value. When an Australian bank has lent $900,000 for a $1,000,000 house in Blacktown, it puts that $900,000 in its accounts as an asset. There is no way that this $900,000 “asset” can be honestly used as a comparison to a $90,000 loan against a $100,000 house in Atlanta. Australian banks are horribly undercapitalised when using what should be fair value for their assets. When the tide goes out, the “assets” the banks hold will prove wildly over stated and tax payers will have to foot the bill for the banks stupidity. This is not fair. What needs to happen now is that banks must recapitilise to closer to double their current capital to survive the coming debt crisis. The banks have been earning 15% to 20% returns on their very leveraged equity. Reducing this leverage will make banks less profitable and thus the bankers bonuses will pay for any future losses, not your taxes.

 

  1. In the US, people look to start businesses to create wealth. In Australia, people look to borrow as much as they can to buy assets that they hope someone else will buy off them at a higher price – the greater fool theory. Australia has hollowed out our economy from this rent seeker attitude. We have very few internationally competitive businesses. We have an enormous number of rent seeking dependent businesses based on selling second hand houses to each other. Too many of our intelligent people go into mortgage broking, real estate sales and banking. We have the largest property to economy ratio of any nation in history. In other words, there has never been a society in history more dependent on rising property values than Australia. This is an utter failure by our country because it will not last and when it turns, there is nothing of note to pick up the slack. We have to restructure society so that there is far less incentive to enter the rent seeking leveraged unproductive asset sales game and enormous incentive to improve society through capital investment into productive businesses. This is done through grants and taxes. Malcolm Turnbull has started this concept, however the amount of $1 billion he proposes is a drop in the ocean compared to the trillions of dollars that has gone into reshuffling second had property. His innovation grants need to be expanded 100 fold to have any impact.

 

We are supremely confident that none of the above measures will be enacted in the short to medium term where they are desperately needed because they are too rational and politically unpopular. Thus we remain very worried about Australia’s next few decades of falling income into rising debts. Australia could not be in a more precarious situation for the coming years. We will likely never be as worried as we currently are for our nations wealth.

 

Those that still have excess property or a family home with debt that is greater than 4 times gross wages, please speak to your adviser as soon as possible to properly prepare for what is coming.