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Tuesday, October 14, 2014

Property Narratives Using Data & Wording Obfuscation

In a recent article on Property Observer (Lies, damned lies and housing statistics) commentator Arek Drozda discusses Australian property statistics. He tells the reader many commentators write stories around property numbers that can't be relied on.
 
Drozda claims that "data does not lie". However, data is just a collection of facts and statistics for reference or analysis and, as Janine Skorsky of House of Cards says, "There is no arrangement of facts that is purely objective."
 
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The above is my introduction to an article I wrote for publication on Property Observer in response to some recent observations by commentator Arek Drozda. You can read it in full here: Subjectivity, damned subjectivity and housing statistics.


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BB.

 
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Wednesday, October 8, 2014

Property Professor Fudges Property Growth Numbers

Don't believe all the property stats you read on Twitter or view on TV. That's my warning as I watch The Property Professor (aka Peter Koulizos, who lectures on property investment and runs related courses) continue to mislead by publishing his miscalculated RP Data figures.
 
Last month I spotted The Professor on Twitter making some bold claims about prices in Australian capitals, such as:
 
"Melbourne dwelling prices have dropped 7.0% in the first 8 months of 2014. Ouch!"
 
"Sydney prices have dropped 0.8% in the first 8 months of 2014. 2014 is a very different year to 2013 for Sydney property owners!"
 
"Adel is the only capital city where dwelling prices increased over the first 8 months of 2014. It was only 1.0% but we'll take that!"
 
It was clear from what I'd seen via multiple housing price data providers (such as RP Data, Residex & ABS) that The Professor's claims had no place in reality, so I challenged him on Twitter:


I found that rather than using the 'year to date' figures that are published each month by RP Data, he was instead taking the median dwelling prices from the first page of each report and calculating the growth results manually.
 
Not only had these figures been published on Twitter, but in the middle of the year they also made local news!


These fudged figures do not reflect reality and thought I'd seen the last of The Professor's use of this methodology (after I'd highlighted the error of his ways)... but he's back this month with a new set of comments, including such corkers as:
 
"SYDNEY – Median House Price at 31/12/13 was $775,000. As of 30/9/14 it was $750,000. A DECREASE of 3.2%. No current property boom here!"
 
When RP Data's published year to date for Sydney shows: +9.8%
 
"MELB - Median House Price at 31/12/13 was $625,000. As of 30/9/14 it was $590,000. A DECREASE of 5.6%. No current property boom here!"
 
When RP Data's published year to date for Melbourne shows: +6.7%
 
And so on:
 

Here are the actual year to date figures from RP Data's latest report (Wednesday, October 1, 2014):


Professor, what are you doing? Please stop spreading ridiculous property figures!


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BB.

 
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Friday, September 26, 2014

Why Serviceability ≠ Affordability (Australian Property)

Still today I see many commentators using the terms serviceability and affordability interchangeably in relation to Australian property. The most recent occasion I noticed was in a post from David Bassanese a week ago where he wrote:
A better measure of house price valuations – which at least allows for the structural change in interest rates over time, though not financial deregulation – is mortgage affordability.  As seen in the chart below, there has been no obvious structural worsening in mortgage affordability over recent decades. Assuming a 20% deposit, loan repayments to purchase the median-priced Australian house have averaged just over 30 per cent of average household disposable income since at least the mid-1980s.
And posted the following chart to support his assertion:
 
 
It shows that initial loan repayments on a median-priced house have remained fairly stable over time (as a percentage of household disposable income). The chart and commentary suggests that "affordability" was the same in the early 1990s as it is today (we have higher prices relative to income, but interest rates are lower), let's compare an example using figures between the two periods to see if affordability really is the same.
 
Based on Bassanese's house price to income ratio:
 

The ratio was around 3.5x in 1992 and 5.5x today. Keep in mind that other commentators who calculate these ratios use different methods, so while the ratio might change around a bit, the change between historical ratios and those today should be similar in a single set/series of numbers. Let's do the sums.
 
With a household on $100k. They save their deposit at a rate of 20% gross income and repay the loan at a fixed amount of $3,500 per month (using this mortgage calculator & interest rates from here to get my numbers below).
 
1992 Numbers: $350,000 purchase price (3.5x income)
Deposit (20%): $70,000. 3.5 years to save.
Interest rate: 11%
Loan amount: $280,000
Repayment: Loan is repaid in 12 years, 1 months. Total paid, $506,980.
 
2014 Numbers: $550,000 purchase price (5.5x income)
Deposit (20%): $110,000. 5.5 years to save.
Interest rate: 5.5%
Loan amount: $440,000
Repayment: Loan is repaid in 15 years, 8 months. Total paid, $657,061.
 
So even if interest rates had remained elevated the entire period of the loan, it still ends up more affordable over the long run to have double the interest rate, but lower price to income ratio. Not only that but it would be faster to save the deposit given that it's a lower amount (relative to income) and I haven't taken into account the higher interest rate on saving for the deposit which would have benefited the 1992 scenario. Costs such as stamp duty which are tied to the price paid would be lower too. Finally, higher interest rates tend to come with a higher rate of inflation, so the real value of the debt would be reduced faster as wages increased, meaning the buyer in 1992 would have found it easier to ramp up the level of repayment.
 
As I have mentioned in the past on housing affordability, I prefer the following basis as a definition for affordability:
 
"Afford: To manage or bear without disadvantage or risk to oneself."

It's clear that although initial loan serviceability might be similar with lower rates and higher prices, the buyer is also at a clear disadvantage over the term of the loan.
 
When considering affordability we need to take a holistic approach and not use a simple snapshot of a single repayment as the basis to make judgement calls on whether house prices or a mortgage used to purchase them is affordable. A mortgage is a long term commitment and shouldn't be treated so trivially by market commentators.

I'm sharing links and opinions daily on Twitter (@BullionBaron).

BB.

 
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Wednesday, August 20, 2014

Bitcoin Gets Capital Gains Tax Break, Why Not Gold?

Late last year ('Glenn Stevens Talks Bitcoin & Competing Currencies') I pointed out that Bitcoin effectively can't be used as a competing currency (likewise for foreign currency or other assets such as Gold) given that it is subject to Capital Gains Tax (CGT) and monitoring the value of Bitcoins as they are acquired and disposed of would not be practical:
"Can you just imagine the administrative nightmare that would result from performing regular transactions in a foreign currency and having to maintain a record of whether you made a gain or loss as a result of fluctuation in the currency markets? It is simply not practical. Bitcoin is not immune from the same requirements." - Bullion Baron
However, earlier today the Australian Tax Office (ATO) released a statement (ATO delivers guidance on Bitcoin) in regards to Bitcoins and their tax treatment. Further information is available on the following page 'Tax treatment of crypto-currencies in Australia – specifically bitcoin' which specifies the following in regards to Bitcoins used in personal transactions:
Using Bitcoin to pay for personal transactions
Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using Bitcoin). Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.
The 'personal use asset' exemption would normally be reserved for items such as a boat, furniture, electrical goods or other household items which are exempt from CGT if purchased for less than $10,000.

The wording on the ATO website is somewhat ambiguous. Does the limit apply per year or can I buy low (to a maximum of $10,000 worth of Bitcoin) and spend high several times in the same financial year and still avoid CGT?

I think this is a good start and would like to see a similar CGT exemption for Gold (as I suggested last year in 'Let Australians Save in Gold Instead of Debt'). That said, I think the limit imposed is patronizing, why impose a limit at all if the Bitcoins are being purchased with the intention of spending them at a later time? Putting a $10,000 cap on the exemption limits the spending of Bitcoins to novelty use only, it wouldn't be adequate for someone having their income paid in Bitcoins, which was also covered on the site:
Paying salary or wages in bitcoins

Where an employee has a valid salary sacrifice arrangement with their employer to receive bitcoins as remuneration instead of Australian dollars, the payment of the bitcoins is a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act.

In the absence of a valid salary sacrifice agreement, the remuneration is treated as normal salary or wages and the employer will need to meet their pay as you go obligations as usual.
I would like to see any monetary asset (Bitcoin, Gold or otherwise) that is saved for future consumption be exempt of Capital Gains Tax. That would allow us to truly have competing currencies in Australia. Being forced to save in a currency whose value is purposefully devalued (via central bank mandate to target 2-3% annual inflation) is madness, especially when interest earned on those savings is taxed and with the real cash rate already below 0.


Those who have purchased and sold Bitcoin specifically for investment are subject to CGT (or taxed as part of your income if traded in the business of regular profit-making):
Disposing of bitcoin acquired for investment

If you have acquired bitcoin as an investment, but are not carrying on a business of bitcoin investment, you will not be assessed on any profits resulting from the sale or be allowed any deductions for any losses made (however, capital gains tax could apply – although see the comments above about personal transactions). However, if your transactions amount to a profit-making undertaking or plan then the profits on disposal of the bitcoin will be assessable income.

There are no GST consequences where the bitcoin is not supplied or acquired in the course or furtherance of an enterprise you are carrying on.
There is another section for those in the business of mining Bitcoins:
Mining Bitcoin

Where you are in the business of mining bitcoin, any income that you derive from the transfer of the mined bitcoin to a third party would be included in your assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses you make from the mining activity may also be subject to the non-commercial loss provisions.

Your bitcoin is trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.

GST is payable on the supply of bitcoin made in the course or furtherance of your bitcoin mining enterprise. Input tax credits may be available for acquisitions made in carrying on your bitcoin mining enterprise.
The section that deals with ATMs and exchanges is probably the most off putting with an indication that businesses in this area will need to charge Goods and Services Tax (GST), likewise in the supply via mining as mentioned above:
Taxpayers conducting a bitcoin exchange (including bitcoin ATMs)

Where you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds you derive from the sale of bitcoin are included in assessable income. Any expenses incurred in respect to the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction. In these circumstances, the bitcoin is trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.

GST is payable on a supply of bitcoin by you in the course or furtherance of your exchange service enterprise. Input tax credits are available for bitcoin acquired if the supply of bitcoin to you is a taxable supply.
This seems to put local Bitcoin exchange and supply businesses at a competitive disadvantage if they have to charge buyers a 10% premium. It would be likely to drive Australian Bitcoin buyers to international sources which don't charge GST.

It is good to see that the ATO has finally addressed Bitcoins for tax purposes, but I don't think they've done a particularly good job here.


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Friday, August 15, 2014

Go Big Or Go Home, Soros $2.2 Billion Bet On SPY Puts

As I've previously covered on this site (Soros Reloads SPY Puts, $1.3B Bet On S&P 500 Decline & Soros Fund Bets On Lower Stock Market (SPY Puts)), Soros has been betting big with a SPY Put position which has fluctuated wildly in size over the last couple of years. As reported in the latest 13 Filings the position just reached it's largest size yet in both nominal value and as a percentage of the portfolio (at least of those positions which are required to be reported for the 13F).
 
The $2.2 Billion position is now 16.65% of the portfolio which was a 605% increase over the previous quarter.
 
Click Chart To Enlarge
As I've explained in the past a SPY Put position is essentially a bet that the price of the stock market (S&P 500) will head lower, though the position could also be a hedge or part of a trading strategy. As the reporting period ended on June 30th, the position may be larger or smaller today.
 
The next largest holdings in the Soros Fund (for comparison in size) are a $450.5M position in YPF (Argentina's largest oil company) and a $411M position in SPY Calls (essentially the opposite of the SPY Puts). 

I'm reminded of some thoughts from Soros earlier in the year where he compared the situation in China to that of the US in 2008.
 
"The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.
 
That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.
 
There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises." George Soros
 
With many of China's economic indicators deteriorating (such as the housing market turning down and a recent big drop in credit growth), a crisis of the magnitude seen in 2008 would likely impact equity markets negatively across the globe, especially those which are reaching overvalued levels. It's only speculation, but perhaps Soros position in the SPY Puts is related to his concerns in this area.
 


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