August 25, 2003


Cathy Sherry shares an epiphany with Melbourne Age readers:

Think of a single house in the suburbs. A vendor cannot say: "I want $400,000 and won't accept a cent less." Not if he or she wants to sell. Ultimately, the price will be determined by how much a purchaser is willing and able to pay.

If the most a purchaser has is $300,000, that is all the house will realise. It will only sell for $400,000 if another purchaser has more money - thus it is purchasers, not vendors, who determine the price.

This discovery -- I call it “the Sherry Illumination” -- will revolutionise economics. Imagine; the amount a buyer is prepared to pay somehow influences the amount a seller is able to demand. Who knew?

Cathy continues with the revelations:

Stamp duty essentially represents the price of a new kitchen - on a property worth $150,000, stamp duty is about $5000; on a property worth $1 million, it is roughly $55,000. No matter how much or little you can afford to pay for a home, stamp duty is never going to make or break the deal. As economist Blair Warman commented in last week's Sunday Age, lowering stamp duty will just take money from the Government, put it in vendors' pockets and add fuel to the fire.

Sherry’s second theory -- that lowering taxes reduces the amount of tax a government receives -- is almost as staggering as her initial discovery (although here she must share credit with the genius Warman). Let us pray the government notices this breakthrough and increases stamp duty, lest “fuel” (ie, your money) be added to any “fire” (ie, stuff you want to buy).

Posted by Tim Blair at August 25, 2003 03:23 AM

And your point is? - aside from the obvious fact that most real estate journos are as dumb as the bricks they sell.

Posted by: Elitism For The People at August 25, 2003 at 03:51 AM

jeebus tim, this is sloppy, even by your standards. it's not difficult to understand:

OK, now let's say the Treasurer was mad enough to give in to the popular push for a cut in conveyancing duty. What would happen to prices?

Well, would you expect the tax cut to lead to a decline in demand? No, probably the reverse. And would you expect it to lead to an increase in supply? No, of course not.

So you'd expect the prices of properties to keep going up (until, of course, the boom turns to bust). In which case, who'd get the benefit of the tax cut? It would go not to the buyer, but to the seller.

The buyer would write a smaller cheque to the taxman...but a much bigger cheque to the seller...
in other words, tax is cut, supply is constant, demand rises, price rises, seller effectively pockets the tax relief, buyer is not better off, but the property bubble has gotten bigger. also, you do realise what would happen if [and do try and notice that qualifier, it's there for a reason] the property bubble burst, don't you?

Posted by: adam at August 25, 2003 at 04:50 AM

Adam, thanks for the link. Funniest thing I've read all day. Especially the part about how "running a gambling game is a licence to print money".

Posted by: scott h. at August 25, 2003 at 05:49 AM

Well done, Tim. Yet another Stunning Expose of a journo caught red-handed Explaining The Situation in what are outrageously Clear and Simple Terms and shockingly Providing An Illustrative Example, so that even the Man In The Street can understand it.

Have you reported this to Media Watch?

Who knew? cries Tim. Probably not those mentioned in the Conveniently Snipped First Paragraph:

Rising house prices are often discussed as though some invisible hand is vindictively turning a ratchet each year or greedy vendors are driving prices up. In fact, it is purchasers who drive up prices by being ready, willing and able to pay more.

Posted by: Geoff at August 25, 2003 at 09:32 AM

Cathy Sherry, future Nobel Laureate in Economics.

Posted by: Alex Robson at August 25, 2003 at 09:43 AM

I use Bold Font and German Capitalization Rules. That makes my point Effective.

Besides, if the Stamp Tax has as little effect on purchasing decisions as Sherry says, then the demand is effectively constant when it the tax is lowered. So "adding fuel to the fire" is more like "pissing in a volcano". The whole debate can then be excused to philosophical territory, where the individuals on this board may decide whether "tak[ing] money from the Government [and] put[ting] it in vendors' pockets" is good or bad in principle. Hey, it's her argument.

Last point: It's just kind of a funny post, ankle-biters. Jim Treacher said it best: "Seems like most of the people who really hate [Tim] have no discernible sense of humor, so I think it's less of a left/right thing than a stick/no-stick-up-the-ass thing."

Posted by: Dylan at August 25, 2003 at 09:55 AM

If I walk into a Porsche dealership with $5, under the 'Sherry Principle' I should be able to get myself a new 911 Carrera.

'Ultimately, the price will be determined by how much a purchaser is willing and able to pay.'

Posted by: Mike Hunt at August 25, 2003 at 10:31 AM

The thing about property is that people will usually spend as much as they can afford, no matter what that is. Sherry's See-Spot-Run article is right in that lowering stamp duty will only let buyers spend more to get that dream home.

That said, high stamp duty does act as a deterrent to people's mobility - something rather anti-rationalist in principle. It acts as a brake on labor moving to where jobs are going. If you have to sell your house in Melbourne and buy in Geelong to work - you'll pay a penalty of several thousand dollars to the government just so you can keep paying them income tax. The end result is that people don't sell, they commute, leading to a whole host of other problems.

Further, amongst all the self-serving squeals from the real-estate lobby to cut stamp duty, many critics forget it might not be such a bad thing to let first-home buyers off the hook, thus giving them a better sniff against property investors.

Of course once the stock market takes off again, those investors will have better things to do - particularly as we're probably entering a flat property growth period anyway. Property price growth has alarmed "experts" by doubling in seven years. Eh. Traditionally it doubles every eight (going back sixty years), but then the headline "Experts alarmed at perfectly normal behaviour" doesn't sell papers.

It makes me think that a buoyant economy - in particular a thriving business sector with relatively static wages - would be a brake on property prices. Lowering interest rates could actually slow the property market over the long term.

Posted by: Craig at August 25, 2003 at 10:46 AM

Cathy Sherry will be the next Ross Gittens, such are her awesome insights into Australia's economy

Posted by: Tex at August 25, 2003 at 11:04 AM

Adam, supply is not constant. When home prices go up, more homeowners decide to sell. As the supply of homes for sale rises, the price starts to fall. Some potential sellers decide not to sell. Prices rise.

When home prices fall, more people decide they can afford to buy. Ultimately, the rise in demand raises prices; some potential buyers drop out. Prices fall.

Any rise in price can be a deal-breaker for some potential buyers. Apparently, Cathy Sherry hasn't heard of the concept of "margin." There are potential buyers who can afford, just barely, a $150,000 house. If it's $155,000, they'll drop out of the bidding.

In California, we spend half our time discussing housing values. Everyone knows this.

Posted by: Joanne Jacobs at August 25, 2003 at 11:10 AM


Hey, I knew it was a funny post. I should have put more smiley's in my reply to indicate that I was taking the piss, too. I thought the Big Bold Font was a dead giveaway of a certain tabloid style. :-)

Posted by: Geoff at August 25, 2003 at 11:13 AM

...lowering stamp duty will just take money from the Government [and] put it in vendors' pockets...

She seems to think that the tax money belongs, by right, to the government and some fools are in favor of letting actual people getting hold of it.

Also, these "vendors" she speaks of would be called "sellers" in the US, reminding us that they're just people trying to sell their houses, perhaps so they can move, rather than capitalists we can all feel free to gouge.

How is this stamp duty collected? If you get a 30 year mortgage for a $150K house, another $5K in the mortgage might not mean much. But if you have to fork over the $5K in a lump, you bet that makes a difference.

Posted by: Angie Schultz at August 25, 2003 at 11:17 AM

What the heck do Stamps have to do with selling houses?

Posted by: ErikZ at August 25, 2003 at 11:32 AM

"What the heck do Stamps have to do with selling houses?"

If the government can extract revenue out of it, it doesn't have to have anything to do with it.

Posted by: Tex at August 25, 2003 at 11:33 AM

The really clever thing about the whole equation is that while the state governments are siphoning off revenue in the form of stamp duty, in the case of a new house, the federal government hands some of it back in the form of the first home buyer's scheme, having passed the money through several layers of bureaucracy, each of who extracts their own costs. This brilliant scheme keeps several layers of public servants employed, artificially inflates the costs of new housing and costs taxpayers a poultice; only government can come up with something so idiotic.

Posted by: Habib Bickford at August 25, 2003 at 11:47 AM

Oh, dammit. Sorry, Geoff.

Posted by: Dylan at August 25, 2003 at 11:59 AM

Tim mate---Why knock Ms Sherry. She was only trying to teach an economic fact to the Great Australian Yobocracy.

Posted by: Gadfly at August 25, 2003 at 01:46 PM

Gadfly, if Sherry wants to teach economics then she should understand some first. What she said was mainly right, as long as only telling part of the story is good enough. Sure prices cannot go beyond the point of being affordable, but lack of supply relative to demand is what is driving the prices up. The amount of dosh I have doesn't matter so much once a few vendors are competing for my precious business.

The economics was just a little part of the article. Most of it was about how we're big bad greedy consumers for not wanting to live in a fibro shack like our sainted grandparents who chose that fibro over the enormous brick palaces they could have bought.

I'm with Tex, I reckon Sherry has been to special economics tutorials from Ross Gittens.

Posted by: PJ at August 25, 2003 at 02:17 PM

in other words, tax is cut, supply is constant, demand rises, price rises, seller effectively pockets the tax relief, buyer is not better off, but the property bubble has gotten bigger. also, you do realise what would happen if [and do try and notice that qualifier, it's there for a reason] the property bubble burst, don't you?

If you picked up a first-year microeconomics textbook, you would discover a notion called "the deadweight loss due to a tax". You should acquaint yourself with this notion before posting again on this subject. Trust Me.

Posted by: Gavin at August 25, 2003 at 03:03 PM

The article is not about economics.

Sherry's simplistic economic sketches are used merely to illustrate her point about the herd mentality of buyers.

While it is still possible to buy a $200,000 house two or three suburbs from a $400,000-median suburb, certain types of mainly inner urban home buyer will pay the premium - and live with any consequences.

It's a dual gamble - that interest rates won't skyrocket and that jobs remain safe.

At the end of the day, they alone have made the choice - therefore stamp duty costs and other factors are side issues.

Posted by: ilibcc at August 25, 2003 at 04:05 PM

PJ - if you're going to accuse someone of having a simplistic grasp of economics, you should be able to do a little better than explaining a speculative bubble as being caused by "lack of supply relative to demand".

Well, yes, in a way . . . but then again, you kind of miss the real story.

Posted by: Mork at August 25, 2003 at 04:57 PM

I seem to recall that the idea was that when the Federal Government introduced GST, all the rvenue was to go to the States. In return they would drop stamp duty. But of course, you can't keep a Labor state government away from taxing people.

As for MS Sherry, and her supporters, they are all twits!!! PRICES ALWAYS NEARLY ALWAYS COME DOWN WHEN A TAX IS REMOVED! I am an indirect tax expert and I have seen the same result happen again and again. When the Government removes or reduces the tax payable on something, or a court holds that something is taxed at a lower rate than previously thought, the price of the relevant thing nearly always comes down.

Posted by: Toryhere at August 26, 2003 at 02:09 PM

PJ PJ are you there?
What size is YOUR mortgage?
Mine is ziltz, zero, nix.
You see my friend I learned a fact of economics which I'm sure Ms Sherry would agree with ___ Buy what you can afford ; bugger mortgages. Then when the next "boom' is underway--sell. Then buy in another place. Repeat process--become wealthy.

Posted by: gadfly at August 26, 2003 at 02:48 PM

I'm renting at the moment, circling like a vulture waiting for interest rates to rise a few points then leap on some forced sales. Cynical? Nasty? sure- but also realisitic. If people are dumb enough to over-extend and buy at the wrong end of the market, to them I say caveat emptor.
No doubt when the arse falls out of the property market there will be droves whinig about "why weren't we warned" and "the gummint should bail us out".

Posted by: Habib Bickford at August 26, 2003 at 04:42 PM

Habib, You are a member of the real world.
Good on you--do'nt feel at all bad about being more intelligent than "the mob".
Many of the posters on this particular subject have shown the same intelligence, although not in exactly the same words.
If we read back through the postings, it is evident that there are a few who are P. platers, just out of Uni. with an Economics degree. They tend to be rather noisy with their opinions---but betcha--they'll be up front with "the guvmint should do somethink (no sic)" .

Posted by: gadfly at August 26, 2003 at 07:15 PM

lemme get this straight. ya'll pay sales tax on a home purchase in Australia? that's stupid.

Posted by: paul at August 27, 2003 at 01:57 AM

Yes Paul NOR is the interest tax-deductible.

Too much government. Sucks us dry.

Posted by: ilibcc at August 27, 2003 at 11:42 AM