Houses can't make us all rich - the true beneficiaries are the banks
Houses can't make us all rich - the true beneficiaries are the banks; Accumulating wealth through increased house prices is not progress and it's not prosperity
Tweet Topic Started: 24 Oct 2014, 04:41 PM (676 Views)
While a recent report might suggest Aussies are the richest people in the world because of high house prices, the reality is the true beneficiaries of this boom are banks and lenders, writes Warwick Smith.
The latest Global Wealth Report, released by Credit Suisse last week, indicates that Australians are the richest people in the world (based on median wealth). The biggest contributor to our wealth is house prices. This news has been enthusiastically embraced by economists and journalists alike.
Even the usually sensible Saul Eslake, of Bank of America Merrill Lynch, seems to indicate this is a good sign, saying "rising house prices tend to reduce inequality, as they make up a greater part of middle class wealth".
This is a little bit like saying that because the market price of a human heart has gone up we're all now rich. Increases in house prices are only really beneficial to those who own more than one house. If you only own one house, like you only own one heart, the circumstances in which you can really benefit from price increases are rare.
Owner occupiers might be wealthy on paper but it means virtually nothing to their wellbeing or even material prosperity. For those who don't own a house but would like to, increases in prices are, at best, disheartening.
The very high median house prices in Australia are driven largely by capital city prices, particularly in Melbourne and Sydney. Many young people in these cities have given up the dream of owning their own home because the only way it's vaguely possible is if they live in far outer suburbs with few services and hours of commuting. Young families who do manage to purchase a home (rarely can it be done on a single income) are often forced to work more than they would like, leaving kids in childcare and after school care when they would rather be spending time with them.
The true beneficiaries of ever increasing real estate prices are the banks and other lenders. Most Australians spend a very significant proportion of their incomes paying interest to the banks, either directly on their own mortgages or indirectly via their landlords. The higher house prices go, the more income is captured by the banks. Saddling our young people with a lifetime of debt is not a cause for celebration, it's a problem to tackle
Current government policy actively props up real estate prices by making housing investment artificially attractive. Negative gearing and the concessional treatment of capital gains (individuals pay tax on only half of the money they make from capital gains) distorts the investment market and makes speculating on land prices a very attractive investment option. Public policy should be doing the opposite. We should be directing investment into productive economic activity, not into asset price speculation. Housing construction is productive activity, speculating on the price of existing housing stock is not.
From an economist's point of view, there are plenty of options for tackling housing affordability that would also strengthen the Australian economy and reduce the likelihood of bubbles and recessions. These include abolishing negative gearing and the concessional treatment of capital gains and increased use of land taxes.
Accumulating wealth through increased house prices is not progress and it's not prosperity. Wealth that is gained through rising land prices is what economists call economic rent; it's unearned income. Landowners do nothing to cause land price increases, which are actually a result of community and government action. As a result, the income should belong to the community.
From a politician's point of view things are not so simple. Any politician who even suggests meaningful measures to tackle housing affordability will be attacked by those with a vested interest in ongoing real estate speculation. The banks are at the top of that list as well as being at the top of the list of corporate donors to the Liberal party. However, the banks are far from being the only obstacle. There are also the million or so individuals in Australia with investment properties. Grandfathering of current provisions plus incremental shifts in tax arrangements spread over many years (as the ACT is doing) can overcome some of these problems but significant political will would still be required.
As a nation we can do a lot better than funnelling our wealth and aspirations into never-ending growth in house prices. Despite this, doing something meaningful about housing affordability is not on the political agenda of Labor or the Coalition because there is no bottom up pressure on them to act and plenty of top down pressure not to.
While most media outlets continue to unquestioningly report price increases in a positive light there is little chance of this changing.
To be expected from Australia's corrupt politicians...lap dancing for wealthy mates and Chinese business men
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
Ever since they enclosed land rights, its the land owners that take the benefit. The credit suppliers have a stake, but its the land owner that takes the economic rent, this is not a new concept.
Ever since they enclosed land rights, its the land owners that take the benefit. The credit suppliers have a stake, but its the land owner that takes the economic rent, this is not a new concept.
Yet it is one violently resisted by leading bulls on this forum.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Really good article, I'm surprised this train of thought isn't echoed more in mainstream media but then again it probably reaffirms the belief that the major outlets are bound by vested interests not to take such a line.
The leveraged bulls need capital gain (economic rent/unearned income as it's called in the article; and over and above that attributable to inflation I guess) - As their after expense income from rent isn't going to make them a profit.
Neg gearing offsets a portion of the loss of course. But in and of itself it doesn't turn a loss into a profit.
Hmmm - Have just been doing some sums. And suspect I'm wrong about them needing the capital growth to cover them off on inflation - As it wasn't their loot to start with anyway. Just money they borrowed. And if I am correct in that, even at capital gain of maybe 1.5% pa (ie rather lower than inflation as such), they'd see themselves as breaking even? Interesting.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy