Clap your hands if you believe in the Wealth Fairy

Every night while we sleep, the Wealth Fairy flits from home to home stuffing riches into the magical savings accounts Australians call ‘housing equity’. In the morning, newly renovated kitchens buzz with activity as mums and dads get the kids off to school. Coffee mugs clink on granite bench tops and Mel and Kochie chat about hot investment opportunities in nearby suburbs.

By lunch time, hard working mums and dads are sipping coffee from paper cups as they check real estate web sites for signs of fairy magic. But recently the magic seems to be fading. Wiggly lines which once pulsed and surged with fairy energy now hang limp. The Wealth Fairy’s light grows dim.

Across the ocean in an evil place called Wall Street, pirates in pin stripe suits concocted a dreadful drug. Blended and distilled from all the toxic securities that have come into their possession, the poison sits invitingly in glass on the bedside table. The pirates placed it there for Wealth Fairy along with a small pile of teeth they pulled from impoverished first home buyers. In her innocence, the fairy has been drinking the poison. Now she is dying.

It is now the darkest hour of night. When the Wealth Fairy’s light finally blinks out all the wiggly lines will collapse. The mugs of coffee will slip from the fingers of the mums and dads and shatter on hard slate tile floors. And when Christmas comes the new wool carpet under the shiny foil and plastic tree will be bare.

There is only one way to save Christmas. If only enough young people believe in the Wealth Fairy we can bring her back to life. Look at her now as she raises her head slowly from the floor. She imagines she can see the hands flying up at auctions across the country. With promises of fat first home owner grants ringing in their ears they jostle with each other as they push through the doors of real estate agents’ offices across the land. And with every contract they sign, the darkness fades and a little of the fairy’s light returns … or so the mums and dads hope.

This entry was posted in Economics and public policy, Humour. Bookmark the permalink.
Subscribe
Notify of
guest
11 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Tony Harris
Tony Harris(@tony-harris)
13 years ago

The idea of the Wealth Fairy is closely related to the notion that home ownership is such a good thing that it is “sacrosanct”, to use a term applied when Fannie and Freddie were in full flight backing toxic loans. I seem to recall that there used to be a special rate for home loans in Australia, prompting complaints from economists that we were putting too much capital into homes at the expense of other kinds of investment, including productive enterprises. At least we did not adopt the US practice of allowing the interest on the loan for your own domicile to be a tax deduction.

With any luck we may be moving out of the era when the family home was just about the only wealth that most people had at the end of the day. More people have super and more people have shares. Maybe that will encourage people to be more realistic and prudent about their expectations from all kinds of investment.

Tel_
Tel_
13 years ago

Providing people with clean, safe and moderately comfortable homes (and making sure they own those homes so they get looked after) is hugely in the interest of any government. People in a stable home have something to lose, so they are more likely to support the current status quo. They are less likely to ferment uprising, or cause trouble. They are more likely to have children and spend time and effort looking after those children.

Rental properties are usually poorly maintained because the owner doesn’t have to live with the consequences, and the people who are living there are financially penalised for any effort they put into improving the place. Plus, renters are constantly at the whim of landlords, being evicted or facing arbitrary rent rises. When people are being pushed out into the street, it is very hard to explain to them that the system is working.

However, providing large, expensive luxury housing is not in the interests of the state. Indeed, ideally providing anything better than necessary is not in the interests of the state because resources consumed in luxury housing are resources that don’t go into industry or military or infrastructure or other state objectives. Of course, the interests of the individual may not coincide with the interests of the state in this particular matter. Individuals do enjoy luxury housing and particularly enjoy having slightly better housing than their neighbours.

As for “Wealth”, no one in this day and age seems to even be able to define what it is; so whether it comes from a fairy or from a reserve bank or from Henry Paulson’s now infamous electronic printing press is a largely academic point.

NPOV
NPOV
13 years ago

“Rental properties are usually poorly maintained because the owner doesn’t have to live with the consequences”

How so? The owner is the landlord, and (s)he certainly does have to deal with the consequences of having their tenants devalue their property through improper care. Almost all poor maintainence of rental properties that occurs does so at the lower end of the market, presumably because many renters can’t afford to do so, and the landlord is prepared to take advantage of a tight market to put up properties for rent that have obviously seen better days.

I’ll also say that in my admittedly limited experience in both house-hunting and rental-property-hunting I’ve seen far more poorly maintained owner-occupied housing than poorly maintained rental housing – indeed I can’t recall a single occasion when a rental property was obviously in bad shape.

Tel_
Tel_
13 years ago

Well the “subprime” push in the USA was all about providing properties to cover the lower end of the market, so I’m guessing there would have been an excellent chance that if those same people had been pushed into rental properties instead of subprime mortgages then they would have been in the typical “land owner barely cares” situation (admittedly, the overall cost would have been a lot lower if they had been stuffed into crappy rentals).

I agree that the luxury side of the rental market does tend to be better maintained.

However, you have to consider a bit more than just basic maintenance. For example, would a land owner consider a rainwater tank for a rental property, or solar hot water? Probably not, because the electricity saving of the solar hot water is a boon to the tenant and the rainwater tank might reduce excess water usage and improve the gardens but the tenant pays for excess water and the tenant was to maintain the gardens with or without available water — not a problem for the owner. Same applies for good quality thermal insulation, use of natural lighting and a bunch of similar stuff.

Looked at from the big picture, encouraging smaller footprint living helps the nation as a whole, but at the level of each particular decision the person making the decision tends to think about themselves.

Patrick
Patrick(@patrick)
13 years ago

I can’t agree entirely with the force of NPOV’s sentiments (maybe I’m in a lower rental bracket than he is) but I was about to write sth very similar nonetheless.

However I will also point out that Tel’s third paragraph contradicts the second, both explicitly (what does the first paragraph say is in the interests of the state?) and implicitly (wouldn’t the effects cited in the first paragraph tend to produce inordinately greater tax collections thus immensely facilitating all of the goals cited in the third paragraph?)

Tel’s fourth paragraph is just hard to understand. I don’t think anyone really struggles with having an adequate understanding of what Don Arthur’s concept of wealth represents.

Overall I certainly agree that people have been too ready to invest in houses, however, I have a question about one feature of housing investment that puzzles me. All my friends who have asked my opinion about buying a house (a suprising number given my lack of any qualification to answer that question!!) I have told they should strongly consider renting and investing the difference between their rental and hypothetical mortgage payments in a moderately geared share portfolio (probably awful advice as it turned out, remind me not to listen to myself).

People often respond with the argument that they could never actually do that, so a mortgage represents (for them) their highest possible savings rate.

Is this a widely-observed feature, or indeed is it a bug?

Patrick
Patrick(@patrick)
13 years ago

Dammit, missed Tel’s second take – in response to which I would ask do you really think that humans are so irrational that they couldn’t price in such effects? Ie I will pay $x more rent since I will have $x+.1x less utilities expense?

Ken Parish
Admin
Ken Parish(@ken-parish)
13 years ago

My general non-expert understanding is that in the long term investments in either shares or real estate tend to result in roughly equal returns. Both generally fare significantly better than inflation in the long run though not necessarily at a particular point in time if you sell at the bottom of the market. For example, if you bail out of shares right now (e.g. because of margin calls on geared investments) you’d no doubt be doing worse. It depends whether you’re looking at them as long-term investments or not. Real property is essentially a long term, illiquid investment, whereas it’s feasible to be a more active trader in shares and therefore to make higher returns (albeit with higher risk) in shorter time frames. If you’re not financially compelled to flog your share portfolio right now or retire and turn your superannuation into an annuity, then the whole current fiasco is probably pretty irrelevant.

“Mum and dad” investors who bought into the share market shortly before the bubble started bursting some months ago may well have had “wealth fairy” delusions, as might those who bought into the real property boom in Sydney and Melbourne before it hit the wall somewhat less severely 3 or 4 years ago. I don’t really feel all that sorry for them, and I’m not sure how or whether governments could/should protect them from the consequences of the patently silly belief that either share or real estate investments will always keep rising without interruption and are risk-free. In fact they ARE fairly risk-free as long as you gear conservatively and either invest for the long term (and therefore ride out peaks and troughs like the current crisis) or trade actively only to the extent that you can afford to lose your stake without losing your family home and basic retirement “nest egg”.

JC
JC(@jc)
13 years ago

think you’re right Ken. the only issue is time is against you. It could take 15 years for people to recover some of their losses while some never will in their lifetime.. Think of say a Japanese investor who bought aussie stocks when the Yen was 100 and now 58. S/He’s been hosed.

Say it was BHP at 45 bucks costing 4500 yen. Now it’s 1392 yen. That’s not a loss, that’s a savaging (at a loss of 70%). It will take that person 18 years to make it back at 7% without even taking the time value of money into account as it would be longer. Losses slow down the process of capital accumulation horrendously.

JC
JC(@jc)
13 years ago

This is another example of just how horrendous these losses have actually become.

If the Dow Jones hadn’t fallen and kept on accumulating at 7% compounded, it would have taken the DJIA 9 years to get to 25,000 (from 14,000). With the Dow now at 8,500 the process will take 16 years assuming the same compound rate. Same for Oz too. These losses have slowed down global wealth accumulation considerably not too mention there may be a possibility that the compound factor could have also slowed (which we don’t yet know).

rog
rog
13 years ago

problem with property -vs= shares is that when you want a ‘little bit’ you can sell a few shares but you have to sell a whole property. As fer property trusts…

rog
rog
13 years ago

That should be ‘property -vs- shares’

For those who are predantic