Before we get on to today’s Money Morning, this…

“The 2010 Walkley Award goes to… Jason Clout, for the Australian Financial Review’s ‘Rear Window’ column.”

That would be the result if your editor had, a) any influence over the award, and b) any interest in having any influence over the award.

In last Friday’s Money Morning we wrote:

“Let’s see if Peter Martin and the other mainstream journos have balls big enough to take on the might of Christopher Joye. Rather than just fawning at every word he says and reprinting verbatim whatever he writes in the press releases, ask him some hard questions.”

Not surprisingly Peter Martin didn’t take up the challenge. But then again we didn’t expect much, considering the roll call of commentators Martin links to on his blog:

Peter Martin commentators

There he is, in all his glory.

But, where Peter Martin failed, Jason Clout reigned supreme. On page 38 of yesterday’s Australian Financial Review (AFR), Clout wrote what can only be described as a… cynical review of El Joye’s claims.

I know, I could barely believe it either.

Of course, we should also point out that your editor received an honourable mention in the same article, but we’ll assure you that hasn’t clouded our judgement of Clout’s wonderful and poetical writing style!

Take this snippet from the last couple of paragraphs of the article:

“And Rear Window notes today’s figure of 9.8 per cent has also fallen sharply from the 13.8 per cent result Joye would have found if he had made the comparison a year ago. But that average includes the income of people who aren’t paying off a mortgage – and there wouldn’t be too many mum-and-dad home owners who are only paying 10 per cent of their disposable income on loan repayments. If the average couple was earning $100,000 between them, that would only be possible on a house worth about $150,000.”

Hats off to Jason Clout. We can’t say we know him from a bar of soap. But what we can say is that he’s done something no other mainstream journalist has ever done – question the claims of Christopher Joye.

So, that’s one mainstream journo who’s risen to the challenge. We think we’ll create an honour roll for all those young journos out there who are prepared to stick up for common sense and argue that property prices can’t rise forever and that taking out a massive mortgage to support the price bubble isn’t a positive for the economy.

But if the Sunday Telegraph is to be believed, then for some home buyers, the price crash has already started:

“Our real estate losers – a quarter of Sydney homeowners have lost money”

According to the weekend’s article:

“Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.”

That’s no surprise to us. And that’s only the half of it. Because if you factor in the transaction and financing costs, we’ll bet that over half the properties bought and sold between 2005 and 2010 were sold for a loss.

The sad thing is, most of those sellers won’t even realise it.

When sellers whoop and cheer after they’ve sold their house for a $50,000 “profit” they rarely remember to deduct the thousands they paid in stamp duty and the thousands more they’ve paid in interest charges.

And not forgetting the devaluation of their money through inflation.

It’s not dissimilar to the gambler who celebrates a $10,000 win at the casino but forgets to mention the $20,000 he or she lost the night before.

Which all makes a mockery of the claims that house prices can keep on rising.

And just remember, this is during a period when house price growth was supposed to be, at the worst, stable. Think about what will happen when the bubble really bursts.

Already the banks have started to tighten their lending ratios. That’s not good for an asset class that’s dead without credit. And believe it or not, credit is hard to get if there’s less saving.

You see, it’s saving which provides the best source of credit. In an ideal world there wouldn’t be any funny business with banks creating money out of thin air, or banks getting their funding for loans using debt securities – just remember the $13 trillion of off-balance sheet debt Australian (yes, Australian) banks are holding.

But we’re not going to focus so much on the off-balance sheet debt. Instead, there’s another set of tables from the RBA that’s worth paying attention to.

As much as we’re not a fan of the Reserve Bank of Australia (RBA), their statistical tables can make for some pretty interesting reading.

This morning we stumbled across the ‘Gross Domestic Product – Income Components’ set of numbers.

We picked that set of numbers for a reason. Let’s be honest, the whole ‘debt to income’ and ‘debt to assets’ ratios have been used to death in the last couple of weeks. Not just by us, but by everyone it seems.

But a set of numbers of equal importance – maybe more so – are the income comparisons between today and fifty years ago.

These numbers highlight that it’s not just the property spruikers and the bankers that are to blame for the rising credit bubble, it’s that the government is right at the heart of the problem.

The same government that the naive look to for help and support. Yet it’s the very same government that has contributed to drop in the savings rate and the increase in credit.

Anyway, we ran through the numbers and come up with some fairly interesting outcomes. And I’ll admit, the first surprised us…

Let me ask you this: Would you agree with the statement that today we live in much more of a consumer driven economy than fifty years ago?

Most people would answer ‘Yes.’

Well, it turns out that ‘consumption’ spending as defined by the RBA has barely changed in the last fifty years. In 1959/60, households on average spent 68.2% of their total before tax income on consumption.

In 2009, the figure is… 66.5%. In other words, as a percentage of before tax income, consumer spending is actually slightly less than it was fifty years ago. We don’t live in the age of the consumer after all. Or do we?

Unfortunately, nothing is ever that simple.

Because over the last fifty years, that’s pretty much all that has stayed the same. Every other statistic highlights not only the fact of increasing debt, but decreasing real income, and also the main reason for it.

Here’s a rundown of the key points:

  • Percentage of total household income taken in income tax: 6.28% in 1959/60, 12.79% in 2009

  • Saving as a percentage of consumption: 15.58% in 1959/60, 5.73% in 2009
  • Percentage of income used on saving: 10.63% in 1959/60, 3.81% in 2009
  • Percentage of ‘other outlays’ against income: 4.05% in 1959/60, 10.26% in 2009
  • Disposable income as a percentage of household income: 89.67% in 1959/60, 76.95% in 2009

That’s a lot of numbers to digest. So let me put it simply for you, whichever number you compare between 1959/60 and 2009, Australians are in a worse position financially.

And this is just looking at income. As I say, we haven’t even considered debt levels. Besides, we all know that measure is off the scale.

But what these numbers really show is that behind the facade of technological advancement – iPods, mobile phones, plasma TVs – from an income perspective, Australians are poorer today than they were fifty years ago.

I know, we’ll hear the argument that we now have nicer and bigger houses. That cars are better. That you can fly to London in 21 hours rather than a six week boat trip.

But that’s got nothing to do with wealth. People in the 1950’s and 1960’s would have looked back at the 1910’s with similar amazement at their lack of technological advancement.

So, what’s the reason for today’s comparative lower standard of wealth?

The obvious starting point is the level of taxation. Remember, these numbers are based across the entire population so it also includes those with no or very low incomes which will tend to distort the percentages lower.

Even so, on a comparative basis it’s still useful to see how much the wealth of Australians has gone down the toilet in the last fifty years…

And as I mentioned, the starting point is tax. The numbers clearly show that the tax burden has doubled since 1959. And that’s just income taxes. Never mind the other taxes you get stung with such as GST.

But it’s interesting to see the knock-on effect. It’s interesting to note it isn’t consumption that’s suffered since 1959. As we’ve seen, consumption levels as a percentage of total household income are almost exactly the same.

However, if you compare the amount of consumption spending against disposable income then it’s a different story – in 1959/60 consumption accounted for 76.07% of disposable income, yet in 2009 this had increased to 86.48%.

What does that tell you? It tells you that Australians have been able or have had to maintain consumption levels. Food and clothing are obvious necessities and we would think the demand for which are less likely to change over time.

But it also tells you that Australians now have to devote a much larger amount of their disposable income towards those necessities. The increased tax burden has forced that.

And the increased tax burden has meant a sacrifice elsewhere. That’s right, increased taxes have led to a direct decrease in the amount of savings.

You can see that in two stats: saving as a percentage of consumption has fallen to 5.73% from 15.58%, and the percentage of income allocated to saving has fallen from 10.63% to just 3.81%.

It’s therefore no surprise that individuals have found it either necessary or possible to increase their debt levels without reducing their consumption. On one level it’s something they’ve had to do in order to just maintain the same standard of living as before.

And on another level it’s something they’ve been forced to do as more credit has devalued their dollars and led to an increase in prices.

Hence the property and banking ponzi scheme we’re experiencing now. The more credit that’s available, the less valuable your dollars become and therefore the more credit you need to afford things. It’s the proverbial vicious cycle.

That’s evidenced by the stat our pal Chris Joye has focused on to claim there is no debt bubble. Fifty years ago only 4.05% of total household income went towards ‘other outlays’ – this includes interest repayments.

Today it’s 10.26%. That’s more than double. And if you compare ‘other outlays’ as a percentage of disposable income then interest repayments have tripled – 13.33% compared to 4.52%.

And even worse than that, over the last thirty years Australian investors have been conned into believing that the only way to build wealth is to go into debt – and the more debt the better.

The reality is that the opposite is the case. That’s perfectly clear when you look at the income levels over the last fifty years.

Financial advisers and spruikers – share spruikers too – have brainwashed Australians into believing that the ‘balance sheet’ is the most important part of household and company finances.

They’ve used rising house prices and rising share markets to back their claims.

They claim that leverage increases the returns, but then forget to mention both the increased costs and also the increased potential for losses.

The reality is that the ‘Income Statement’ is the most important aspect to both individuals and companies. It’s income that provides the long term support for the balance sheet.

Without income – as many companies and individuals have experienced – an illiquid balance sheet is next to useless. And a balance sheet loaded with debt is a death trap if the source of income is lost.

Just think of all the companies that went bust and which had so-called ’strong fundamental assets.’ The reason they went bust is because they lost their income stream, and because the assets were revealed as a sham.

The numbers from the RBA show just how much the income wealth of Australians has dropped thanks to excessive taxation and the burden of debt. Don’t believe the spruikers who claim you’re sitting on a property goldmine that’s making you money every day.

Because in the long run, it isn’t. It’s just funny money that will soon evaporate as soon as the income stream is gone.

As the numbers prove, you can’t improve your income by increasing your debt. All you end up doing is going further into debt and reducing both your savings and your standard of living.

Cheers.
Kris.