The prices of agricultural commodities such as sugar, wheat, and soybeans have been falling for some time now. This can be seen in the performance of the QAG ETF.
For a number of months now I have been thinking that these commodities cannot go down forever. If this were the case, soybeans, sugar, etc would eventually be free. Could this be a buying opportunity?
Buy bank ETFs and rent a cheap unit instead.
Recently the Australian government has announced in its Budget 2017 that there will be a bank tax applied to the five biggest banks in Australia. This may affect me because I live off dividends, and much of these dividends come from Australian banks via ETFs. When I mentioned my concerns to others, I was surprised at how much hatred others have for banks in Australia, which is surprising to me.
I am not too concerned by the bank tax, and I will continue to invest in ETFs that invest in high-dividend paying stocks (e.g. HVST) as well as the finance and banking sector (e.g. OZF and MVB). The reason why I am confident is because I feel that banks can simply pass on the tax expense to borrowers by raising interest rates and fees. Many people may be unhappy about this, but they have the freedom to take their business to other banks.
Banks should also benefit from the cutting of the corporate tax rate from 30% to 25%.
The housing affordability scam
The budget also includes a complex scheme whereby people saving up for a deposit to buy a home can salary sacrifice at most $30k per year into their superannuation fund thereby obtaining tax benefits and then taking that money out to use as a deposit on a home.
This, in my opinion, is such a scam because it is effectively the same as the various grants that the government gave to home buyers. Why put first home buyers through the whole process of putting money into super to get tax benefits and then taking it back out again? Why not just give the expected tax savings to these first home buyers directly?
The scheme also does nothing to address housing affordability because every economist knows that the price of housing will go down if demand goes down and supply goes up. If there are tax benefits to using super, and if super is used to buy houses, this will only increase demand, which increases prices. Make no mistake, this scheme does not help buyers. It is designed to prop up the market.
Once again, first home buyers are being scammed. The major problem is that most first home buyers don’t understand economics and believe that the government giving them money will help them buy a house. Rather, it will simply drive house prices up even more thereby requiring them to get into even larger debt. The debt that they’d be getting themselves into will also be nondeductible debt, which means they pay more tax than if they had borrowed the money to buy a investment property or other investment e.g. ETFs.
What should you do?
Unfortunately I don’t see the housing affordability issue being addressed because too many people benefit from high house prices, so governments will do what they can to prop up the market. Homeowners benefit from higher prices; banks earn interest from mortgages; and real estate agents, property developers, builders, and lawyers also make money from the property boom. Those hoping to buy a house suffer, but the solution seems to be to help them become homeowners, and when these young homeowners finally buy a house with government support, they have a vested interest in high property prices, but what many of them don’t seem to understand is that they are buying into a very expensive market by loading themselves up with so much debt they effectively become slaves to the bank.
Those who borrow from banks to buy houses believe they are oppressing renters, but really in most cases it is the other way around. Rental yields are so low that the average Melbourne house only produces about 3% in rental yield. If you had $1 million and invested it in a house and rented it out, you make $30k in rent. Had you invested that money in NAB shares as of today you’d be earning 8% dividend yield, i.e. $80k per year if you invested $1 million, which means you could invest your $1 million in bank stocks, earn $80k, rent that house you wanted for $30k, and have $50k leftover. By buying the house, you lose $50k in opportunity cost.
The market will continue to be propped up because everyone benefits, and those who don’t benefit think they are benefitting. First home buyers think that by receiving government money they are closer to buying a home, but they don’t realize that homes will be more expensive. Those who recently bought a home think they are better off than if they rented, but they don’t understand how much they will pay in interest nor will they understand how much opportunity cost there is in owning property. The best slaves are those who believe that they are the oppressors.
The major problem with housing is that it is commonly associated with a debt-fuelled depraved and wasteful materialistic lifestyle. Once someone borrows large sums from the bank, it is not just a massive house that they buy. They increase their spending in other ways, e.g. furniture and renovations. The debt that they hold tricks them into believing that they have more than they actually have.
The solution then is to go back to basics. Own bank ETFs and live cheaply off the dividends. You can rent a cheap self-contained unit in the outer suburbs for less than $250 per week and then wake up early to commute to work via train. Insecure tenancy is not a problem in the age of Airbnb. Renting gives you the freedom to move to different areas to minimize costs and maximize opportunities. Renting also frees up cash flow to enable you to seek out the best investments.
When I was younger, I rarely went out. I preferred to stay inside and indulge in cheap electronic entertainment. As I invested more and more and started to earn more dividends, I found myself in a position to go out every now and then, but I have realized that I actually hate going out. I would prefer to stay home and watch Netflix. It just so happens that netflixing is much cheaper than going out, and it is very enjoyable as well.
Netflix pours billions of dollars each year into content production, which means they are able to provide extremely good entertainment to its customers, and customers only need to pay $12 per month. It’s a good deal, in my opinion. It is far better than going out. When people at work show off to me that they went out to a restaurant to a vineyard, I am not afraid to just tell them that I am a hardcore netflixer.
I was talking to colleague earlier this week about how Netflix is an investment because you save up so much money on Netflix that you are able to pour massive sums of money into ETFs. What I hate about “going out” is that it has become such a status symbol. People brag about going out and socializing as if there is something so special about it when really all they are doing is moving themselves to a new location and spending significantly more for it.
When I started working full-time, I was saving about 80% of my salary whereas now I am saving 100% of my salary and living off dividends. I think what is most important is that you pick a savings rate and stick to it. Whether you eat out, pack your lunch, buy coffee, or whatever is irrelevant as long as you stick to your savings goal. Many people focus on small things such as skipping coffee and saving $4 per day, but I find that many of these people skipping coffee are blowing their money on holidays, cars, and so forth. Often skipping coffee is not a savings plan but a reaction to blowing your money elsewhere. Picking and choosing isolated examples of how you save money is meaningless. It’s the overall savings rate that matters.
I Live Off Dividends 