Grease or no Greece ???

Sound Money. Sound Investments editor Greg Canavan. Greg looks at the Greek bailout and China's ability to save European bacon.

-- As far as can kicks go, this one was not a bad effort. The question you should ask, though, is how long it will take the market to accept this latest European bailout still doesn't solve any fundamental problems. It is just a shameless attempt for gain without pain.

-- Let's look at a few of the details. Greece will get a 50 per cent haircut on its debt? Not so fast. Their total debt load is a mind-boggling €350 billion. This includes around €70 billion in loans from the IMF etc. and about €75 billion that the European Central Bank (ECB) has kindly purchased from the private sector.

-- These amounts will not be subject to a haircut, so Greece is still on the hook for this debt. That leaves around €200 billion subject to the 50 per cent reduction...which actually means it's only a (roughly) 30 per cent trim (we wouldn't even call it a haircut).

-- Given Greek pension funds and banks own a decent chunk of this outstanding amount, it's easy to see who's really paying for this. Banks 1 Greece 0.

-- As an aside, events like this go to show the mainstream press are not up to the task of reporting the facts. Today's front page of the Australian says the haircut will cost banks €150 billion. Then one dot point later it says banks will be forced to strengthen their balance sheets by €106 billion...which, if true, would leave a capital deficit of €44 billion. Clearly, it's not true.

-- This will apparently leave Greece with a debt-to-GDP (Gross domestic product, or economic growth) ratio of 120 per cent by 2020. The Bank for International Settlements recently released a paper showing debt levels were bad for growth when debt hit around 85 per cent of GDP.

-- How is Greece meant to return to private debt markets and borrow unassisted with a still debilitating debt load? (Banks 2 Greece 0).

-- But that's not really the point of this whole exercise. It's a political stunt designed for maximum gain and minimum pain. And as far as the European Financial Stability Facility (EFSF) goes, there's only 'agreement' to leverage it up, with no concrete details on where the money will come from.

-- Apparently the 'rich' nations of China and Brazil (the ones with income per head of population much lower than the countries they are meant to be helping) will stump up some cash for the EFSF. We'll see. If they have any brains they'll steer clear.

-- And China could well be occupied with its own problems. According to a recent FT report...

In recent days, small and sporadic demonstrations have broken out at a handful of real estate sales offices in large cities such as Shanghai, with angry recent homebuyers organising sit-ins and demanding refunds after developers started offering discounts on neighbouring apartments to attract new customers.

-- The cracks are starting to appear in China's property and fixed asset investment bubble. Authorities have halted work on 6,000 miles of railway construction because financing has dried up.

-- As we pointed out in our Sound Money. Sound Investments report earlier this week, the government has stepped in to guarantee the debts of the Railway Ministry to try to get credit flowing to the sector again.

-- Good luck...the Ministry has a debt load of around US$330 billion, or 5 per cent of GDP. There is so much overcapacity and inefficiency that debt has grown faster than the revenues from the network.

-- As China's investment boom subsides - and it surely will - there will be plenty of other ministries and broke local governments putting their hand out for central government support and guarantees.

-- If you think Western nations are liberal with the bailouts, wait until China buckles under the weight of its credit boom. Everyone who bought an apartment in the past two years will be screaming at the government to get his or her money back.

-- As a result, the Chinese government's fiscal position will be much more precarious this time next year. So Europe better hurry up and coax money out of the Chinese while the central planners are still labouring under the misapprehension they can control their economy.

-- A Daily Reckoning reader recently visited China and kindly sent us some observations. Here are a few of them:

1. The very best apartment space in Shanghai is quoted as Y120,000 per square metre, that's about $NZ24,000. I suspect that is more expensive than just about anywhere else in the world and the quality of life is well below Aussie or NZ standards.
   
   
2. There are plenty of half built apartment buildings on which work appears to have stopped, especially in the smaller cities (small by Chinese standards)
   
   
3. Nothing good is cheap. A Longines watch my wife bought in NZ for $460 was priced at Y25,600 (NZ$5,120) in Shanghai.
   
   
4. The China Daily reports that the money for many railroad and highway projects has run out. Evidence of this is plain to see with unfinished bridges a common sight. The same report says that many migrant workers have not been paid wages for up to 4 months. (Could only happen in a Socialist Paradise!)

-- China has one of the most lopsided economies in history. Investment (in things like bridges, railways, apartments etc.) represents nearly 50 per cent of economic output. In its industrialisation phase in the late 1960s, not even Japan was so dependent on investment spending to generate economic growth.

-- And when that spending is fuelled by credit (using pumped up land values as collateral) you get price inflation and poorly allocated resources. This is what our DR reader sees on the ground in China.

-- So enjoy this stock market rally while it lasts. The Europeans have filled the punchbowl and turned up the music. Everyone is dancing.

-- But like the Troubled Asset Relief Program (the US bank bailout) based rally in 2008, this one will also fade. Within a few months, it will be evident the debt crisis is spreading. If we have learned anything over the past few years, it is that government interference in the market mechanism creates tremendous distortions.

-- These distortions don't manifest straight away. While they are building, false hope and optimism cloud their emergence. But we can guarantee that unintended consequences are already unfolding. When they will show themselves is anyone's guess.

-- So while the music's blaring, it might be worth nonchalantly making your way to the door. Because when the music stops this time around, the exits will get very crowded.

Greg Canavan
Money Morning Australia

Asian countries line up for Aussie gas

China not the only coal in the fire as other Asian countries line up for gas

By Terry Ryder, 29th September 2011

When economists dumb things down for the media, I’m unsure whether they do it for us or for themselves. I suspect the latter, remembering that an economist is someone who likes to play with numbers but lacks the personality to be an accountant.

The dumbest of the dumbing-down behavior is the tendency to see everything in terms of China. This explains why a common question I get at seminars is: what if China stops buying our resources?

The answer is in two parts: (1) China won’t stop, although they may reduce; and (2) it’s not all about China.

The new gas industries around Australia are signing their advanced sales contracts, even before they build the processing plants, with South Korea, Japan, Indonesia, Malaysia and elsewhere.

There’s hundreds of billions of dollars in projects happening with markets other than China already signed up.

And, of course, there’s the looming presence of India. Over the past five years exports to India have tripled, taking India from our seventh-largest trading partner to fourth biggest – and rising.

While everyone has been obsessing over China, the big companies of India have been quieting staking their claims in our resources industries, particulary coal.

One of them, Adani Enterprises, is making a $10 billion play for Queensland coal based on vertical integration. The company says it wants to control everything the coal touches.

It has secured a $3 billion coal resource in the Galilee Basin, the emerging new resources province in Central Queensland.

It has spent $2 billion on a 99-year lease over an export facility at Abbot Point, near Bowen. It plans to build a second export facility near Mackay.

It will also be constructing rail links to both ports from the Galilee Basin, at a cost of about $3 billion.

Adani, which has seven power stations to fuel, will even own the bulk carriers which will ship the coal to India. It expects to start exports in 2015.

Another big Indian company, GVK Power and Infrastructure, is also planning to invest $10 billion in the Queensland coal industry.

It has agreed to pay Gina Rinehart, apparently Australia’s wealthiest woman, $1.26 billion for some of her mining assets.

It will take a major stake in three Queensland coal mines owned by Rinehart’s Hancock Prospecting, plus associated rail links and port facilities.

Again, the focus is the Galilee Basin, where GVK will take a 79 per cent share of the Alpha and Alpha West coal projects and 100 per cent of the Kevin’s Corner coal project.

It will take 100 per cent of the 495km rail link project connecting the coal mines to Abbot Point, where there is also an export port development with the capacity to handle 60 million tonnes per year.

Infrastructure developer GVK, which is involved in airports, roads and urban infrastructure, is seeking fuel for new power plants in India, which has become one of the world’s major customers for energy resources as its economy expands.

Coal from the projects is also likely to be sold to Japan, Korea, Taiwan, Vietnam and, oh yes, also to China.

These two giant Indian companies are putting multiple Queensland locations on the hotspotting radar screen:-

• Emerald, the key regional centre between the Galilee Basin and the established Bowen Basin;
• Bowen, which will be linked to the Galilee Basin by new rail lines and which will be targeted with billions of dollars in investment to expand the Abbot Point export facilities;
• Mackay, a key regional centre for the the Galilee and Bowen Basins - it has the Hay Point and Dalrymple Bay export facilities, which are undergoing major expansion; and
• Alpha, the tiny town west of Emerald where all the new coal-mining action will be focused.

Alpha, inevitably, will become a considerably larger town. The three mines being taken over by GVK will generate around 84 billion tonnes of coal per year, with the first phase of production scheduled to begin in 2014.

Other Indian investment in Australian resources includes the $830 million deal under which another infrastructure firm Lanco Infratech has acquired Griffin Coal which has major assets at Collie in Western Australia.

Lanco has said it will spend $1 billion expanding the Collie mines, increasing production from 5 million tonnes per year to 18 million by 2015.

renovate my SMSf Properties ??? Wow...

SMSF trustees get green light on renovation

Wednesday, 14 September 2011

By: Staff Reporter

A draft ruling by the Australian Taxation Office has given self-managed superannuation fund members the ability to use money from inside their fund to renovate their property.

Previously, the ATO said SMSFs could not use money from any source to improve property, however, under the draft ruling they can potentially renovate to improve the value of the property.

Charterhill Group Chartered Accountants chief executive officer George Nowak told Smart Property Investment that the draft ruling would ultimately make real estate a more attractive option to the $420 billion SMSF sector.

“We have been in support of this outcome since the 7th July 2010 when the remodelled legislation was delivered. It is an absolutely positive move,” he said.

According to Mr Nowak, the drafted legislation clarifies some nuances of error in the original legislation.

“The ATO understands that the future buoyancy of the property market will be heavily dependent on SMSFs’ investing in property as well as providing rental occupancies for younger people.

“This new drafted legislation, which will almost certainly become law, addresses everything everyone I have spoken to in the industry has been scratching their heads over.”

But while SMSF trustees will be able to renovate using money within their funds, borrowing to renovate will remain prohibited.

Ken Raiss, director of Chan & Naylor, told Smart Property Investment, the prohibition of borrowing to renovate property held in a SMSF was very difficult to understand.

“Hats off to the ATO – a lot of good things have come out of this draft ruling,” he said.

“The fact that you can now renovate, with non-borrowed money, is very good.

“But the main problem is that the ATO’s draft ruling neutralises or diminishes the sole purpose test which is to provide retirement benefits to members.”

With the ability to manufacture capital growth through renovation a big drawcard for property investors, the same capacity should also be available through SMSFs, he said.

“If you’re looking to provide retirement income you should be allowed to maximise it.”

Mr Raiss said he hoped the ATO would consider this when it came to finalising the ruling in the next month or so.

Learn to be excellent investors

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ANOTHER VIEW FROM AN ETERNAL PESSEMIST.

“If Only They’d Step on the Brakes”

Melbourne, Australia. Wednesday, 4th May 2011

If Only They’d Step on the Brakes
“The problem of leverage, the sheer volume of debt in the economy, is still very large and this poses massive macro-economic challenges. I think these macro-economic challenges will last many years.”

So says Bank of England Governor, Mervyn King.

Meanwhile, in Happyville, Eric Johnston informs readers of The Age:

“Westpac has delivered a seven per cent increase in first-half cash profit to $3.17 billion as charges for bad debts fell away sharply in a further sign the worst of the financial crisis is behind the banking sector.”

He’s right. It is behind the banking sector. Close behind. And catching up fast. We have an urge to say “Behind you”, pantomime style!

It’s not often we agree with central bankers. But on this occasion we’ll agree with Mr. King.

Of course, you need to take his comments in context. Because he also said:

“The economic consequences of high-level indebtedness now would become more severe if rates were to rise.”

Which is why he voted to keep the Bank of England interest rate at a record low of 0.5%.

It’s the economic equivalent of refusing to step on the brakes as your car is travelling at 200km/h towards a brick wall, because you’re afraid of wearing out the brake pads!

The truth is, touching the brakes may not stop the economy hitting the wall, but it’ll certainly slow the car down.

But what Mr. King’s comment reveals is central bankers have played the odds. They figure it’s more important to have a long economic depression that “will last many years” rather than allow a sharp and temporarily damaging bust.

Why would they take that view?

Take the pain now

Simple: a short and sharp bust is damaging in the short term to individuals and corporations – including banks. But in the long term, it’s positive for individuals and most corporations – excluding banks.

In contrast, a long economic depression supported by taxpayer funded bailouts is great for individuals and corporations – including banks – in the short term. But in the long term it’s only positive for the banks… individuals and most corporations will ultimately lose out.

The reason is it prevents bad loans being purged from the economy.

Individuals and businesses that would otherwise have gone bust are – in effect – prevented or disinclined from doing so.

Instead, their credit is extended, the interest rate is cut, and the incentive to declare bankruptcy or default is lessened.

That may seem like a good thing.

But it isn’t. At a higher rate of interest, the “bad” borrower just pulls the pin and cops it on the chin. Simply because they can’t afford to keep going. Perhaps they forfeit some assets to repay the debt, but that’s it. They move on.

OK, we know it’s not as clean cut. We’re sure going bust is a painful experience for anyone that’s gone through it. But we’re illustrating a point. And that is, the “bad” borrower is punished for his or her foolishness in borrowing a bunch of money they couldn’t afford to repay.

Part of the punishment is they’ll find it harder to get another loan in the future. Hence the disincentive to take out a loan in the first place if they feel they may not be able to repay it.

And the lender is punished for lending money to the individual or business.

If the lender has a diversified loan book they should have more than enough “good” loans on the books to outweigh the bad loans. Unless of course, the bank has been reckless with lending because it believes the lender of last resort (the central bank) will bail it out.

Oh, and by the way, being reckless with lending doesn’t just mean subprime mortgages. Australia’s banks are as leveraged as US or European banks.

Just remember, even good borrowers can turn bad when the proverbial hits the fan. Especially in an economy that’s built on the resources sector supplying funds for the banking sector to lend to the service sector.

Once the resources profits dry up, where will the service sector and consumer get the money from then?

It’s not as though there’s a productive economy in place to create additional profits – look at the lack of profit growth from the non resources and banking sectors.

Anyway, when interest rates are kept low, there’s less of an incentive to default. The cost of keeping the loan is reduced and the borrower considers it worthwhile muddling through.

Creating a zombie economy

The trouble is, it creates a zombie economy where the economy is full of debtors trying to repay debt. Rather than an economy of entrepreneurs trying to innovate.

But even in cases where debtors do walk away, you’ve still got the central bank backstopping the default. Again, this prevents punishment for mistakes. It means there’s no incentive for the banks to be more cautious in the future as there’s no dire consequence for them.

It means there are no direct losers from the bad loans.

The borrower wins and the lender wins. The only losers are the indirect ones – the taxpayer.

In contrast, without taxpayer funded bailouts, in the short term everyone loses from a credit bust… or mostly everyone. The borrowers have to default and their access to credit is withdrawn.

The banks go bust as they are unable to recover the loans. And, as savers fear the safety of their deposits, a run on the banks is caused, sending them into actual bankruptcy.

That means of course that savers are punished too.

Which is how it should be. That’s right, one of the major reasons for the Australian and global banking bailouts was to protect savers. Now, you may think that’s a good thing.

After all, saving is good. Surely savers did the right thing compared to borrowers who overextended themselves.

That’s only partially true.

While savers may not have overextended themselves by taking out huge loans, they’re still culpable. For the simple fact that they kept savings in a bank savings account in return for interest.

Savers didn’t care how the bank was managing its loan book. They didn’t care they were helping to inflate the housing bubble. Savers just wanted the best interest rate. How many savers connect a higher savings rate with the possibility the bank is taking a higher risk with its loans?

Not many we’d wager.

And that’s the ultimate reason why the banks were bailed out. A failure to bail them out would have destroyed faith in the banking system. And this would have made it hard for the surviving or new banks to attract depositors.

And naturally that would make it hard for those same banks to extend credit – which would be disastrous for them given the engorged size of their loan books. How would they keep the Australian housing Ponzi scheme going then?

They couldn’t.

That’s why banks worldwide had to be bailed out at all costs. Failure to do so would have resulted in the end of the current banking and money system. And when housing markets crashed overseas, the banks needed more bailouts.

Without it, it would have meant an end to the privileged position of the bankers and central bankers… no wonder they prefer a long rather than a short depression.

Ignorance leads to more problems

Trouble is, while the bankers make happy sucking in ignorant dollars from savers in order to lend money to even more ignorant borrowers, it prevents the cleanout the economy needs.

A good example of the trouble the banks have gotten into can be seen if we take another look at banking history. In this case we’ve picked out the 1973 ANZ Bank annual report.

Several readers replied to yesterday’s letter to point out Aussie banks operated as separate entities until the early 1980s – trading banks and savings banks. And that much of the home lending was done through the savings bank.

“You’ve misled your readers”, was the accusation. Not so…

The following snapshot will give you a good indication of the respective bank balance sheets in 1973:

Look, we’re not saying the banks were angels. But the fact is, this was still a time when borrowers and lenders still had a concept of what real money was.

It was a only a few years before 1973 that the Australian 50 cent coin contained 0.34 of an ounce of silver – incidentally, one of those old coins is worth about $12 in today’s money, that shows you how much the currency has been devalued.

Not only that, but for bankers, bank runs were still a fairly recent memory.

Which is why in 1964, the ANZ Bank Savings Bank only had $83 million of loans outstanding against $369 million of deposits. That’s a 4.4:1 ratio. Even by 1973, after the world had gone of the US dollar gold exchange standard, the ratio was still 3:1.

Although clearly the expansion of credit had begun.

Now, if we factor in the Trading Bank and Savings Bank combined, if we say the Trading Bank loan book was 25% to “persons” (as it was in 1978), that works out as $505 million of loans.

Add that to the $382 million of loans for the Savings Bank, and you’ve got a 20% exposure to “persons” – much of which we’ll guess was for mortgages.

In other words, ANZ Bank’s exposure to the mortgage market in the 1970s was actually less than we’d given them credit for yesterday! For every $1 in deposits it loaned just 20 cents to “persons”.

A banking reversal

And so the shift from financing productive industry to unproductive housing has been even greater than we’d thought.

If you compare those numbers to today’s ANZ balance sheet you’ll see the transformation. In 2010 ANZ Bank had $349 billion of loans and $311 billion of deposits. That’s a ratio of 1:1.1.

In other words, more loans outstanding than deposits. For every $1 in deposits, the ANZ Bank lends $1.10 to “persons”!

Now, we understand the bank gets funding for its loans from other sources, but it gives you a clear idea of how banking has been transformed from a warehouse that looks after your savings, to a highly leveraged hedge fund that punts on the housing market.

It marks a complete reversal of the position of 38 years ago. And remember that today retail lending comprises 59% of the bank’s loan book, three times the 1973 amount.

Yet still, we read comments such as this in a Goldman Sachs note this morning, “the earlier run-up in [Australian house] prices was not associated with the usual symptoms of a ‘speculative bubble’ (looser lending standards, higher LVRs, rapid credit growth).”

They could have fooled us. It sure looks like a speculative bubble fuelled by rapid credit growth.

A rapid growth in credit that has shifted from financing productive industry and innovation in favour of piling onboard the easy money of blowing up a property bubble.

Kris Sayce

Australian Autumn Market Update

Australian Autumn Market Update

RBA: May 3 2011, cash rate unchanged at 4.75 per cent

On May 2nd 2011 the ABS (Australian Bureau of Statistics) released the March 2011 House Price Indexes: Eight Capital Cities report (to see report go here).

The ABS figures from the previous quarter to the March quarter show a decline in house prices. The capital cities with the highest drop have been Sydney with a decline of 1.8%, Melbourne and Bris-bane with a decline of 2.5% respectively. The ABS’s data show that the majority of the price index decline is in the $600k-$1.5 mil price cluster.

Dec Qtr 10 to Mar Qtr 11		Mar Qtr 10 to Mar Qtr 11
Established house prices	% change		% change
Weighted average of eight capital cities	-1.7		-0.2
Sydney	-1.8		0.8
Melbourne	-2.5		1.1
Brisbane	-2.5		-3.6
Adelaide	-1.0		0.9
Perth	0.5		-3.2
Hobart	0.4		0.6
Darwin	-1.0		0.5
Canberra	-0.4		1.1
(Source ABS)

The RBA’s latest decision yesterday and again in April was to hold the cash rate at 4.75%. The RBA’s governor Glen Stevens cited borrowing costs to be “a little above average levels” after seven increases from October 2009 to No-vember last year (RBA).

Conversely, consumer confidence is suffering. Living costs are increasing steadily, employment growth has stalled, consumers have closed their wallets and are saving their money rather than spending, so retail revenues are signifi-cantly down, as are credit applications. The threat of inflation and the strength of the AUD are also lurking in the background.

In the last couple of months, economists revised their forecasts to predict that while the RBA was expected to hold rates in May, it may well start adjusting official interest rates by the middle of this year if the economy outside the mining sector does not improve.

There is no better time than NOW to review your individual financial circumstances.

I have noticed in the past few months the number of properties for sale in the market have increased. The ABS is telling us that prices in Sydney have decreased and the RBA has decided to leave the cash rate unchanged. To me this signals the opportunity to exercise buyer power , make the most of it! Don’t be afraid to make offers and negotiate.

Preparation is key, I cannot emphasize this enough. If you have read my newsletters and posts you will think I sound like a broken record. Prepare your financing before you go house hunting to make sure you have the right backing for the property and strategy you intend to go for.

Contact me via this blog to discuss your circumstances to provide you with peace of mind

A real Bag of Property Thoughts

Will “Negative Gearing” remain as a Government Agenda Item?

Suggestions that the federal government is considering a reduction to negative gearing benefits has been met with outrage by the property industry.

The Housing Industry Association (HIA) has labelled reports of a possible new sales tax on investment property as well as a reduction in negative gearing benefits disturbing as well as damaging to confidence in an already struggling housing market.

“The suggestion that the federal government has plans to introduce a new sales tax on investment housing has all the hallmarks of the disastrous move to introduce a similar tax in New South Wales in 2004. This tax led to home building in New South Wales grinding to a halt, a situation from which the state has struggled to recover,” said HIA chief executive Graham Wolfe.

According to a report in The Age, the government has sounded out unions about such potential changes.

“The Prime Minister or Treasurer must deny today’s media claims immediately before substantial damage is inflicted on home building in Australia,” said Mr Wolfe.

The Real Estate Institute of Australia (REIA) has also been quick to criticise the reports.

“Continued investment in property is critical to a healthy rental market. The report that the
government is considering changes to the current model would have a dramatic effect on the future supply of rental properties in an already tight market,” said REIA president David Airey.

“The suggestion appears to be at odds with the government’s goal of addressing the supply of
rental accommodation through the Housing Affordability Fund (HAF) – negative gearing is
complementary to these goals,” he said.

Mr Wolfe said removing negative gearing would be ludicrous.

“Allowing taxpayers to claim interest expenses on borrowings is entirely appropriate – it is not a tax rort. Income from rental properties is assessable, and expenses should be deductible. This is the basic premise of Australia’s taxation system”.

The cost to government revenue of negative gearing is less than $2.5 billion per annum, Mr Wolfe said – around half the amount the federal government will raise through its newly introduced flood tax.

“Yet, despite its small quantum, negative gearing is crucial to investment in rental housing,” said Mr Wolfe.

“After the disastrous flirtation with the quarantining of negative gearing on rental investment property in 1985, and New South Wales Labor’s dire experience with a vendor tax, I doubt the Gillard Government is really suggesting such a strategy,” said Mr Wolfe.

“But the federal government does need to clarify its position on today’s reports.”

Growth in Capital Values v Rental Growth

A comparison of capital city property price growth and rental price growth has confirmed that rents are delivering investors the best returns.

Over the five years to February 2011 capital city rents grew faster than property values, RP Data reported today.

“The debate over affordability in the past five years has intensified however what is often missed is the fact that over this time capital city rental rates increased at a greater average annual rate than capital city property values,” RP Data senior research analyst Cameron Kusher said.

During the five year period capital city house and unit values increased at average annual rates of 6.2 and 6.7 per cent while rents grew at an average annual rate of 6.8 per cent for houses and 7.5 per cent for units.

Darwin was the star performer with rents increasing at an average annual rate of 10 per cent for both houses and units.

Rental growth was also strong in Perth with house and unit rents rising at average annual rates of 8.7 and 8.4 per cent respectively.

Mr Kusher said investors could expect strong rental growth to continue.

“With investors and first home buyers reluctant to spend at the moment, couple with housing affordability stretched because of recent value growth and a weaker period of interest rates and construction for the remainder of 2011, we anticipate that this will put upwards pressure on rents,” he said.

Rents can and will grow

The vast majority of renters are prepared to pay more rent in order to stay in their existing rental property, a new survey has found.

According to the Matusik Snapshot, two thirds of renters (67 per cent) are prepared to pay up to five per cent more in rent in order to stay put, while 29 per cent say they will pay as much as 10 per cent more in rent.

The survey, which collected responses from 682 respondents, also found that 71 per cent of renters would like to stay in their current rental property after their lease expires.

According to the report, the rental cost is the most important consideration when it comes to selecting a rental property. Factors which also scored highly among tenants were location, the number of bedrooms, suitable lease term and housing type.

“What isn’t important at all, according to our survey anyway is the ability to keep pets and environmental sustainability measures such as rain tanks, solar power and other water/energy saving devices,” said Michael Matusik, author of the report.

“Many commented that fast internet connection was far more important than the ‘green’ stuff.”

What about State Revenues from Stamp Duties ?

First National Real Estate CEO Ray Ellis has slammed stamp duty on house sales as “inefficient” and “a complete rort”.

The reaction comes after reports that the property industry would support moves to replace stamp duties with another form of tax.

It has long been recognised that stamp duty as a tax is inefficient and a complete rort, Mr Ellis said.

“So, while First National Real Estate agrees it needs to go, it does not support the notion that it be replaced with some other tax.”

Mr Ellis said stamp duty should have been phased out with the introduction of the GST in 2000.

“Now, more than a decade on, we are still being burdened with stamp duty,” he said.

“What’s worse, the property industry appears to be portrayed in some news articles as willing to settle for replacing the duty, instead of having it abolished altogether.”

Mr Ellis said the upcoming 2011 Federal Tax Summit presents the ideal opportunity to get blanket approval from state and federal governments to abolish the levy.

“The government needs to look at policies that will encourage mobility rather than inhibit it.”

High cost of living a threat to property owners

The rising cost of living is placing an increasing strain on household budgets that should be acknowledged in banks’ lending policies, according to Merrill Lynch.

According to a recently released Merrill Lynch report, all of Australia’s banks have relaxed their lending criteria in recent months in a bid to attract a greater share of home loan customers.

The report argued that relaxed lending could put property owners into trouble, as many will be allowed to borrow more than they could possibly repay.

Merrill Lynch research analyst Matthew Davison said the strain on the household budget is too big to ignore and that banks aren’t accurately measuring household costs.

Meanwhile a report from Standard & Poor’s suggests incomes could have just as much impact on mortgage stress as the rising cost of living.

While Standard & Poor’s agreed that the rising cost of living would inevitably put greater stress on borrowers, their report found that not all mortgage stress is being borne exclusively by lower income borrowers.

“In our opinion, for middle-to-higher income earners, the income characteristics of borrowers is another key factor that may influence mortgage affordability, possibly even more so than living cost assumptions,” the report read.

The report found that any changes to income could have a much more significant impact on mortgage affordability and stress in the middle-to-higher income borrower categories than rising living and/or interest costs.

“While income growth can offset rising costs, a drop in income may put significant pressure on certain borrowers.

“For middle-to-higher income earners, we believe that the Henderson Poverty Index (a measure widely used by lenders in Australia to estimate living costs to qualify borrowers for housing loans) does not reflect these borrowers’ typical lifestyle choices and resulting costs of living.

“When qualifying borrowers, most lenders also incorporate a minimum net surplus ratio in their calculations to allow for potential escalation in costs of living and/or interest rates. Nevertheless, we have found that neither cost of living nor interest rate increases erode the net surplus ratio as quickly as a drop in the borrower’s income.”

Supply v Demand in Land Values

Residential land values have continued to rise whiles sales volumes sink, according to the latest Housing Industry Association/ RP Data Residential Land Report.

In the final quarter of 2010 the volume of land sales was down more than 40 per cent compared to 2009 while the weighted average land value grew 4.1 per cent.

“The escalation in land values highlights an on-going deterioration in new home affordability driven by constraints on supply,” HIA economist Matthew King said.

“The sharp drop in the volume of land sales signals a very weak 2011 for new home building.”

Mr King said new housing was sagging under the weight of the excessive servicing costs as well as damage wrought by last year’s interest rate hikes.

“Put together planning and zoning delays, high regulatory costs, deficient land release strategies, disproportionately high taxation, user pays infrastructure charges, and an on-going credit squeeze, and you have a recipe for crippling land values.”

“Policy solutions can be found by all levels of government, but there is currently little evidence of solutions being sought, which is to the detriment of affordable housing for entry level buyers and rental households alike.”

RP Data’s research director Tim Lawless agreed that the low number of land transactions painted a worrying picture for future housing supply.

“Land sales are a reasonable lead indicator for future supply additions to the market and a forty per cent reduction in land sales points to ongoing weakness in the housing construction sector which is already very soft,” he said.