Tobin tax for Australia?

But I see offhand no other way to prevent financial transactions disguised as trade

In 1972, after the collapse of the Bretton Woods system (where currencies where pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the conversion of currencies. As he says - 

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets. (here)

A 1978 article where Tobin reflects on global monetary reform is here, and well worth a read. The relevance to Australia in 2011 is quite clear when he says -

National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exhcanges, without real hardship and without significant sacrifice of the objective of national economic policy with respect to employment, output and inflation.

While Tobin originally suggested that all countries cooperate to implement a standard tax rate, with revenues raised pooled centrally, the idea is equally valid for a single currency-issuing nation to tax conversions of its own currency.

The logic behind the tax is quite sound. An influx of foreign funds only provides domestic benefits when it backs real investment in productive enterprise. And investing in a real business takes time. As Canadian economist Rodney Schmidt noted in 1994

In two-thirds of all the outright forward and [currency] swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year

A currency exchange tax reduces the gains from short term currency trades, and for a single country, allows them to reduce distortionary taxes elsewhere in the economy leading to productivity benefits. It also means there is a strong incentive for national savings to be invested locally, and a cost to banks seeking offshore funding to support their capital requirements. It also provides local governments some degree of control over their economy, rather than being at the mercy of global conditions. These are all good things.

Of course, like any tax, the risk is that governments simply spend this extra revenue unproductively and do not reduce distortionary taxes elsewhere in the economy, which greatly reduces its potential benefits.

In 2009 Brazil implemented a similar financial transaction tax regime that applies to foreign investment in stocks and fixed-income securities at a rate of 2%. And it seemed to work -

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

But only for a while. The chart below shows the Real regained its strength fairly quickly. 

(This is not to be confused with Brazil's former Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira, or CPMF, which was a transaction tax levied at 0.038% on all bank transactions from 1993 till the end of 2007) 

Of course the empirical macroeconomic problem arises once again here - would the Real have been even stronger if not for the tax? Who knows? My gut feeling is that because economic agents adapt very quickly to new taxes, their offsetting behaviour can greatly reduce the intended effect. 

Since that time, the global battle to devalue domestic currency has resulted in many calls to implement Tobin taxes, from the British Prime Minister to the French President, with all political leaders seeking input from the IMF. The IMF is now coming around to the idea (recently releasing this working paper), and with DSK's likely replacement Christine Lagarde being a fan (here), chances have improved that this tax will be supported globally.

There is even strong support from the economics profession, with1000 economists writing a letter in support of the idea earlier this year. A good summary of the breadth of support (and not) for such a tax is here. Even economists at the Australian Treasury are talking about it. 

The cynic in me says that such a tax is unlikely because those who benefit from fast and cheap currency exchange are those with the most money, while those who bear the burden of a high domestic currency are usually the workers in marginally competitive industries.

For Australia I see only upsides to this tax. A lower Australian dollar and reduced foreign investment will help to slowly rebalance our economy to become more diversified and stable again. While the Henry Tax Review overlooked this type of tax, at least we have a backdrop of tax reform to accompany a Tobin tax.

The outcome of this political battle with the global financial elite is anyone's guess.

Anthropologist's view on debt and money

Over at Naked Capitalism is a fantastic interview with David Graeber, author of Debt: The First 5,000 years. The most intersting point for me is that economists just assumed that since money is currently primarily used to estimate exchange value, that this is the historical reason for the existence of money. While this view of money is often a workable assumption, the deeper social issues surrounding money become easily overlooked when you perceive money primarily as a means of exchange, and ignore the role of debt anf conflict as the tru origins of money.

An excerpt is below, and the full interview is worth reading, especially for those curious about Chartalism, Biblical debt jubilees and so on.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Not so random links, comments and quotes

 

Law of demand holds
Bust fares go up, patronage goes down. A lesson for policy makers about defining their outcomes better – do they want cost recovery for transport (higher fares, lower usage), or are they willing to subsidise public transport to save costs of maintaining the road system?

Algorithms rule our lives
The algorithms of Wall Street may be the cyber-equivalent of the 80s yuppie...
The question for the economist is not whether there are downsides to this infiltration, but whether the costs outweigh the benefits. I am pretty sure that is not the case yet – after all, algorithms are written by humans, redesigned by humans, and often ignored by humans.

Culture -
The Misconception:  You celebrate diversity and respect others’ points of view.
The Truth: You are driven to create and form groups and then believe others are wrong just because they are others.

If patents over software are a bad idea, why not all patents?
This article argues that companies find it more attractive to make money suing each other for infringement than actually making things.

The question for society is whether innovations would occur at close to the same level without patents? My personal view is that they would, and that a possible first mover advantage would be reward enough. A short, but very useful, free online textbook on the economics of patents and copyright is here.

Apple iPad patent fiasco

Free trade in apples, finally?
As I said before with food import restrictions, if prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.

Essentially, by protecting our producers from import competition we are paying HIGHER prices for Australian food than foreigners are paying for Australian food.

Of course apple growers will whinge, but they will adjust over time, and in reality, their incomes have been protected for a long time anyway.

Warren Buffet supporters in France - the rich want to be taxed more

Quotes -  
Graveyard market - buyers don't want in, sellers can't get out (ht: doomsday_trader)

After all, statistics are like bikinis. What they reveal is interesting, but what they conceal is more important (ht: John Booth)

If an Axe is being ground, cluelessness will follow naturally. I used to be an ideologue and as I think back on my unreflective self, I remember that I just chose to devote all my mental energy to what I wanted to believe and none to what I didn't want to believe and the result was I appeared clueless, sometimes intentionally clueless (ht: anon)

The lesson of Alaska is never give away land, even when it is seemingly worthless (ht: M)

Gay marriage - questions

The gay marriage debate is extremely interesting. I have a few issues that never seem to be resolved, and are often bypassed in discussion on the matter.

1. Marriage is a religious institution essentially designed to encourage conformity to a norm of one sexual partner, and for specialisation of labour in raising children. Why do so many gay people want to acknowledge this ancient religious anti-gay institution at all? In Australia there are almost no external benefits (in the form of tax treatment, visas, welfare etc) for marriage over de facto relationships. Why not just promise each other you'll be faithful till death do you part? In fact, why do straight people continue to be married (I am, and have my reasons, but I'll keep them for another time).

2. If people want 'marriage equality' why can't I marry my sister? Or my mother? Surely to be equal ALL marriage between consenting adults must be allowed? After all, the main social problems of genetic abnormalities from inbreeding can be solved by IVF - the same way gay couples are having children. In fact, two gay men who happen to be brothers should also be able to marry, no? It is love between two adults, so what's wrong with it? I can't believe anyone could argue for gay marriage and not for sibling marriage, especially between gay siblings, since the arguments are all the same.

3. Any study showing the 'superior' outcomes of children from gay couples (of which there are a few - here's a starting point for some academic research) must control for incomes and other social factors. I have a hard time believing that the 'gay couples with children' sample of society has a similar income distribution to 'heterosexual couples with children' and we know this is a huge factor in child development.

4. Is the desire to have children not in any way related to the desire to mate with the opposite sex? I would have thought that the two are somehow related, which makes me feel like there is more of a 'conforming to social identity' issue at play over the desire to be a progressive gay couple with children.

5. Are children raised by gay parents more or less likely to be gay themselves? It seems intuitive that they would be far more likely, both because one parent would be a biological parent, and the nurturing and exposure to 'gay' behaviour. Is this good or bad? Are children really getting a choice? Will marriage legitimise being gay as normal? Is that a problem?

6. Should gay couples be allowed to adopt children? Why not? Should IVF treatment for lesbian couples be subsidised by Medicare? Surely not.  It isn't a medical condition. If they want to pay the full cost for privately provided IVF from a voluntary donor, so be it.  If they want to meet a guy at a bar and do it the old-fashioned way, that is fine too.  But what about gay male couples? What about married gay brothers? Will recognition of marriage be a stepping stone to more subsidies for gay families?

7. What legal rights exist for the biological parent of the child who is not part of the 'parent couple'? If the relationship breaks down, will the courts decide in favour of the biological gay parent, or the surrogate biological parent?  Will marriage affect this decision?

8. If two children from gay family each have one of the parents as biological, and the other parent a different surrogate (so they are not 'blood relations'), can they be married?  What about if these two children are gay?

In any case, I always wonder why people don't just say why they feel gay marriage is unacceptable instead of beating around the bush about 'equality'. And those who so strongly support gay marriage should think about the flow-on implications to the role of government, the courts, the rights of parents and health care.

If you can't tell, I see no good reasons in favour of gay marriage, and plenty of unresolved issues surrounding rights of married gay couples, particularly regarding children.  Of course, I have no problem with two adults choosing to have a relationship with each other, regardless of their gender.

Econompic - negative real interest rates encourage savings

The basic premise behind stimulatory monetary policy is that lower interest rates reduce the cost of debt, and decrease the returns to savings, encouraging present spending and maintaining asset values. But recent experience (particularly in the US) has shown that in a low (or negative) real interest rate environment, savings rates are climbing.

Jake over at Econompic has put forward a reason this might be the case. He argues that if an individual needs to save a certain amount for future consumption, for example someone who wishes to fund their retirement, a low interest rate means they need to SAVE MORE NOW to reach that point.

What surprises me is that Jake’s hypothesis is fairly consistent with Milton Friedman’s permanent income hypothesis, which asserts that people will try and smooth out their earnings over their lifetime (through savings decisions) to maintain a relatively constant level of expenditure. In Friedman’s model, a transitory income, like prize money, would not be spent all at once, but mostly saved and spent over the rest of one’s lifetime. While the reduced debt burden from low interest rates may been seen as temporary by some people and not greatly affect their spending, the reduced return on savings DEFINITELY means that smoothing out income for retirement requires greater levels of saving.

For example, if interest rates are 5%, someone might want to save $1million in order to earn $50,000 per year in returns on which to live during retirement. But if interest rates are 1%, that person needs to save $5million in order to earn $50,000 in returns to fund their retirement.

One might suggest that low interest rates mean that people who need to save will save more, and people who don’t, will save less. This might translate to quite a variation in saving patterns by age, with the soon to retire boomers increasing savings, with the young workers saving less.

The low interest rates and high savings rate correlation probably also has a lot to do with household repairing their balance sheets following massive losses on equities and housing (particularly in the US and the UK).

Over to Jake for the details (original post here).

Electric v petrol scooter

I've been reading some great posts recently at Chris Eastwood's blog in my view... . Below is a full post comparing the merits of electric and petrol scooters in a detail rarely seen.

But first a few quotes from Chris that might get you interested in some of the ideas floating around on his blog.

By having an increasingly itinerant population is it any wonder that no one gives a rats arse that your home is being degraded? (here)

I recall a conversation with 2 educators on Fraser Island ... that the last thing you want to do is encourage more people to come to national parks, even if it does somehow liberate more funding from the government it won't pay for the extra damage caused by the extra bogans. (here)

The full electric scooter post is below, and the original link here. Chris finds that the electric scooter produces more greenhouse gas emissions than the petrol version. Please keep in mind the rebound effect, since the electric scooter is so much more expensive (the owner can’t spend that money on other goods).

Over to Chris.

Economies of scale do not equal productivity

Only three things matter in the Australian economy - productivity (how much each person produces); employment (how many people are producing); and equality (how that output is shared). All the other random shrapnel of economic news that flies around is kind of irrelevant.

(c/o Andrew Charlton + must read article entitled The Economic Myths of Peter Costello here)

Productivity is the key to greater wealth, as an individual, a nation, and a world. Productivity is doing more with less. It is that simple. Unfortunately people often equate productivity with economies of scale and population growth, which leads to a poor understanding how economic growth really occurs.

If a farmer selectively breeds his crop so that the next generation of plants yield 5% more grain, with no further inputs required (no more water, fertiliser, harvesting time etc), then he has made a 5% productivity improvement. The output in terms of grain is 5% higher for the same inputs.

Productivity gains flow through the economy, allowing us to produce more goods over time. When other farmers follow this lead, we find that marginal land can now be used productively. We find that fewer people need to work in agriculture, because each farmer is producing more food. This frees up labour to be employed elsewhere in the economy, producing other goods to satisfy our desires.

Productivity gains normally come from two sources. The first is in the form of new inventions and innovations in the methods of production - a new engine design, a new breed of plant, a new manufacturing technique or a new material. Innovation in the methods of production is THE key driver of our prosperity.

A second way that productivity improves is through economies of scale. Even in the absence of new technology or innovation, we can produce more output with less input by specialisation of labour, and larger and more efficient capital equipment, to achieve economies of scale.

However, people often get the drivers of productivity confused. They believe economies of scale are the main driver, and innovation is some secondary consideration. But in fact, economies of scale are only sometimes productivity enhancing. Often there are diseconomies of scale, where there is a trade-off between the size of the economy, and the efficiency of the economy. This occurs when the marginal cost of production is higher than the average cost (which is bizarrely where economists believe production usually exists on the cost curve except in the case of a natural monopoly).

For example, urban water supply can initially be produced very cheaply with a network of local dams. However, once local water needs exceed this amount, another source must be found. In Brisbane and Melbourne, this source is desalinised sea water, which is far more costly than any other water. What this means is that the cost of the last batch of water from the desalination plant (the marginal cost) is far higher than the existing average cost of water to the city, which increases the average cost and makes all water more expensive. Businesses that use water will pay more, and that leaves them less able to increase production and invest in their own innovative capital. Households pay more for water, leaving them less income to spend on other goods. We are all worse off, and far less productive, due to this diseconomy of scale in water supply.

There are many other examples from roads, to electricity, to housing.

Another popular view is that there is a connection between the population of a city or country, economies of scale, and productivity - if we don’t have more people, we can’t get the economies of scale necessary to become more productive.

Yet the great problem with this view is that economies of scale do not rely on the population of the geographical area where goods are produced, but on the size of the market being satisfied by that production. This is why German car manufactures in a single Länder (state), with a population of perhaps 10 million, can achieve greater economies of scale than many other manufactures because they supply a global market with a high volume of vehicles. More people in these Länders will do nothing to make these auto firms more productive, and may likely achieve the opposite effect if the required expansion of the housing stock, roads and other infrastructure, competes for labour demand and finance with the car manufactures.

Even if population growth means that expansion of some of our capital stock occurs where economies of scale exist, there is always the need to expand the housing stock – a capital good where economies of scale do not readily exist. Duplicating any capital in this nature comes at a cost to society that can never be recovered. Read more on that here.

The below Venn diagram shows the relationship between these factors and productivity. As you can see, innovation in new production technology is the primary driver, with economies of scale sometime being beneficial for productivity, and population growth usually coming at a cost to productivity.

The implication then is for government especially to be aware of when expansion of publicly funded capital is approaching diseconomies of scale and recognise this cost to society. Why stimulate population growth when it comes at a cost to the existing population in the form of more expensive water, transport, and the diversion of resources from genuine productive investment?

Friday thoughts

Democracy

In a democracy, we put political power into the hands of some and try to limit the damage they will do as much as we can by putting all the obstacles we can think of in their way while giving them the authority to do what needs to be done. (from here) 

Warren Buffet says tax me more. 

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. 

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. 

...Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

...Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

...I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

...I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

But he can make a voluntary contribution of taxes the US government at any time. So why doesn’t he?  As a friend recently suggested, he is trying to leverage his good will by forcing others to come for the ride.  But he also states that his fellow mega-rich friends are "very decent people" and "give most of their wealth to philanthropy" and "wouldn't mind being told to pay more in taxes".  My questions are

Why isn't a greater tax contribution part of their philanthropy? 

What is stopping them? 

Do they feel that giving privately to charity offers more social gains on a per dollar basis? 

If they were taxed more, would they give less to these charities?

'Going green'

This came by email from an unknown original source, but is appearing all over the internet now. Please keep in mind my previous comments about how we increase demand for resources when we learn to use them more efficiently – we expand our use electricity, fuel and another resources in ways we never dreamed would happen.  Also, here is some background reading on the ineffectiveness of 'green' shopping bags.

In the line at the store, the cashier told an older woman that she should bring her own grocery bags because plastic bags weren't good for the environment.

The woman apologized to him and explained, "We didn't have the green thing back in my day."

The clerk responded, "That's our problem today. Your generation did not care enough to save our environment."

He was right -- our generation didn't have the green thing in its day.

Back then, we returned milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled.

But we didn't have the green thing back in our day.

We walked up stairs, because we didn't have an escalator in every store and office building. We walked to the grocery store and didn't climb into a 300-horsepower machine every time we had to go two blocks.

But she was right. We didn't have the green thing in our day.

Back then, we washed the baby's diapers because we didn't have the throw-away kind. We dried clothes on a line, not in an energy gobbling machine burning up 220 volts -- wind and solar power really did dry the clothes. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing. But that old lady is right; we didn't have the green thing back in our day.

Back then, we had one TV, or radio, in the house -- not a TV in every room. And the TV had a small screen the size of a handkerchief (remember them?), not a screen the size of the state of Montana.

In the kitchen, we blended and stirred by hand because we didn't have electric machines to do everything for us.

When we packaged a fragile item to send in the mail, we used a wadded up old newspaper to cushion it, not Styrofoam or plastic bubble wrap.

Back then, we didn't fire up an engine and burn gasoline just to cut the lawn. We used a push mower that ran on human power. We exercised by working so we didn't need to go to a health club to run on treadmills that operate on electricity.

But she's right; we didn't have the green thing back then.

We drank from a fountain when we were thirsty instead of using a cup or a plastic bottle every time we had a drink of water.

We refilled writing pens with ink instead of buying a new pen, and we replaced the razor blades in a razor instead of throwing away the whole razor just because the blade got dull.

But we didn't have the green thing back then.

Back then, people took the streetcar or a bus and kids rode their bikes to school or walked instead of turning their moms into a 24-hour taxi service.

We had one electrical outlet in a room, not an entire bank of sockets to power a dozen appliances. And we didn't need a computerized gadget to receive a signal beamed from satellites 2,000 miles out in space in order to find the nearest pizza joint.

But isn't it sad the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Households better of than 1994... just

Housing market data provider Chris Joye has written a great deal of analysis on Australian housing recently. However his latest graph (above), showing households have more money left over after buying the average home today than any time since 1994, is very confusing.

He explains the data and method as follows.

We decided to simply look at the "average household"--calculated by dividing the ABS's quarterly disposable national income estimate by the number of households each quarter--buying the "average dwelling" in Australia, which is defined as the average sales price in a quarter.

And he explains the findings

Like the RBA, we find that--contrary to popular myth--today's households actually have more disposable income than at any other point since we began our analysis in 1993.

One would hope that with 28 years of economic growth in the mean time household would have FAR MORE disposable income today (after housing costs). What is surprising is how little disposable income has grown because of increased housing costs.

Even Joye’s own graph shows that home buying households were worse off between 2000 and 2009, because any income growth was more than offset by the cost of homes. It also shows that home buying households in 2004 were no better off than in 1994. In fact, if this analysis was undertaken any time prior to 2009 the popular myth would be shown to be true.

I also have some other concerns:

1. The income measure in the national accounts is 57% higher than measured by the survey of Survey of Income and Housing Costs (SIHC) and does not reflect actual household income (see here)

2. The outcome does not pass the common sense test. $43,000 of disposable income left over after mortgage payments, in 1993 dollars, is actually $73,350 in 2011 dollars. This seems like a lot of disposable income for the average household to have left over considering the national median dwelling at $418,000 dollars and the associated mortgage cost of $35,000 per annum. These figures therefore assume that $113,000 after tax is the average household income. This makes no sense to me. You need to have one income of approx $170,000 or two incomes of around $75,000 to meet this income level – that is FAR above average.

3. The outcome appears inconsistent with previous data. For example, mortgage rates in 1998/99 were a little over 6% (compared with a little over 7% today), and prices were about 60% lower than today, according to Joye’s own recent published graphs.

4. The graph shows that mortgage repayments have gone from 25% to 32% of the average household income over the period (which is consistent with Steve Keen’s observations – second graph). To get back to 25% of average income, prices need to fall 20%, or mortgage interest rates drop below 5%.

5. The graph, probably unintentionally, shows that incomes grew 40% in real terms over the period, but after housing costs, they only grew 26% (with most of that growth the past 4 years).

6. Indeed, the 2008 and 2011 blips show that when prices fall home buying households are BETTER OFF. The same applies to interest rates.

I sincerely hope this type of analysis is not interpreted as a reason for house prices to rise and I hope nobody leverages into the housing market because of it without properly understanding the risk they are taking.