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Musings Report #45 11-5-16 When Assets (Like Real Estate) Become Liabilities
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
When Assets (Like Real Estate) Become Liabilities
Correspondent Joel M. submitted an article that struck me as a harbinger of the future: In Greece, Property Is Debt :
"At law courts throughout Greece, people are lining up to file papers renouncing their inheritance. Not necessarily because some feckless uncle left them with a pile of debt at the end of his revels; they are turning their backs on what used to be a pillar of Greece’s economy and society: real estate. Growing personal debt, declining incomes and ever higher taxes as Greece’s depression grinds on have turned property and the dream of easy money into dread of a catastrophic burden.
After many years in which only very valuable properties were taxed, many Greeks went from paying almost no taxes on real estate to not having enough money to pay. In 2010, property taxes accounted for 0.26 percent of gross domestic product, while this year they are around 2 percent, according to state budget figures. "Suddenly, the state treated the Greeks as if they were rich, at the precise moment that they ceased to be rich."
Among the many disruptions of the past few years, this one shows how traditional conceptions — and a sense of security — can be shattered. With a history full of wars, bankruptcies and rampant inflation, Greeks had always seen land as a haven.
But it is private debt — at 222 billion euros last year — that may prove an even greater danger. This shows in government revenues. With the unified tax, ownership of every kind of property is now subject to taxation.
It will be very difficult for the Greeks to get out from under this mountain of debt. Delinquent loans, which at the end of June made up 31.7 percent of all housing loans, were a mere 5.3 percent of the total in 2008."
You see the self-reinforcing dynamics that are in play:
1. Governments desperate for tax revenues raise property taxes, which depresses sales and capital appreciation.
2. High debt levels and high property taxes trigger foreclosures and sales that depress the market with high inventories of unsold/unrented homes.
3. As sales decline, capital appreciation can no longer be counted on to enrich owners. Instead, owners fear declines in value and higher taxes. This further depresses sales.
4. High debt levels become even more burdensome as property values fall.
5. Rather than be a means of building and protecting wealth, real estate becomes a liability that could destroy wealth via payment of taxes and declines in value.
While it can be argued that Greece is a unique situation--a cumbersome, costly bureaucracy of land transfer coupled with soaring taxes--I would argue that Greece is simply early to the party.
Governments everywhere are facing fast-rising pension and healthcare costs, and the need for more tax revenues will skyrocket once the global recession trims income, payroll, business and sales taxes.
Taxes on assets that can't flee the country--i.e. real estate--become extremely attractive to governments.
Once an asset class shifts from being a means of wealth preservation and appreciation to a financial risk and burden, a self-reinforcing feedback loop reduces demand and increases supply, pushing prices lower--just as people feared.
Which asset class attracts new taxes will be different from nation to nation, but we can anticipate governments will go after assets that are currently considered safe and that can't flee to low-tax havens. As a result, real estate is a likely candidate for higher taxes virtually everywhere.
Summary of the Blog This Past Week
"Nothing Good Can Come of This Election"--and That's Good 11/4/16
Hillary Is The Perfection of a Corrupt System 11/3/16
Politics As Usual Is Dead 11/2/16
Hillary and the Ghosts of Watergate 11/1/16
These Blast Points on Hillary's Campaign... Only The Deep State Is So Precise 10/31/16
Best Thing That Happened To Me This Week
An excellent conversation with my longtime friend G.F.B. on tacit tribes and technology, topics that fuel my thinking about the emerging mode of production and the political transformations ahead.
Market Musings: Is a Monster Rally In the Offing?
I recently read a technical analysis case for a monster rally in U.S. stocks in 2017. Is such a rally even possible as the global economy veers into recession?
I didn't find the technical case very persuasive, but there are fundamental reasons to leave the door open to a major rally in the next 6 months.
One is the seasonal trend of strong rallies from November to March. That could be derailed by a presidential election that ends up in court, but it's certainly possible that stocks rally big as the nation breathes a sigh of relief that the nightmare presidential campaign is over, come what may.
The other potential driver of a big rally is a global influx of cash into the U.S. as a safe haven. If things start unraveling in Europe and Asia, capital flows into the U.S. could accelerate, pushing asset classes such as stocks and real estate higher.
These are nothing more than possibilities at this point, but it's probably wise to keep an open mind. If the global economy does veer into recession, stocks could slip into a long-overdue Bear market.
Or perhaps the market has one more rally in it this cycle before it slips into the long overdue Bear market.
From Left Field
Real Rehabilitation -- Prison Gardening (via Chad D.)
Complaints of syringes and feces rise dramatically in SF -- mental health and addiction issues paramount...
Japan Gets Schooled: Why the Country's Universities are Failing -- worth registering to read this critique....
The fatal expense of American imperialism -- cost of Pentagon is now being eclipsed by healthcare and Social Security...
Poor kids who do everything right don’t do better than rich kids who do everything wrong -- privilege at work...
The Nature of Capitalism: The ruling class will never give up fossil fuel, because it’s key to their power over workers.
Restoring America’s Economic Mobility -- not an easy task...
The Agrarian Standard (Wendell Berry) (via Tom R.)
Why the Global WordPress community needs to collectively design a Community Operating System --
"Don’t Touch My Medicare!" Is the beloved program on its last legs?
At the Long Museums in Shanghai, an ostentatious billionaire is using art to put China on the cultural map.
"To plunder, to slaughter, to steal, these things they misname empire; and where they make a wilderness, they call it peace." Tacitus
Thanks for reading--
charles |
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