(St Valentine’s Day will be celebrated privately at home and will make no further appearance in this blog.)
The revelation in the press yesterday that a person on the Australian median income can no longer afford the mortgage payments on the median Australian house price (not sure how long that link will stay live) sparked a bit of a discussion on-line about the Australian government’s policy of ‘negative gearing’1 and its influence on real estate prices.
It was a pretty informed debate (on a newspaper blog page and I can’t find it to link it), and a number of points were made. One was that it’s not so much the negative gearing that has led to the dramatic boom but a number of factors including a commodities boom that has driven the Australia market as a whole, and more importantly a government decision in 1999 to halve the capital gains tax paid when property is sold (that is, the government (and therefore the country) gets a much smaller share of the appreciation in the property, which makes the investment even more attractive). Another factor has been the growth of self-financed superannuation funds (government mandated) into which all Australians pay part of their income, which have led to massive increases in the amount of investment capital sloshing around the market.
Basically, the policy settings have meant a net transfer of wealth from poorer to richer Australians2… which is pretty much what the Howard government has always been about. But there are a number of other, major, negative consequences. One is that, with the current market, the investments are no longer as attractive as they were. The increase in property prices has not been matched by corresponding increases in rent, and with both prices and interest rates rising, returns on investment are dropping, so that even the tax advantages of negative gearing may no longer make it worthwhile to invest in property. That’s already starting to bite, which is leading to a lack of rental property and rising rents, so it may to some extent solve itself (to the cost of renters).
Another is that the whole scheme relies on an endlessly upward spiral in property values… but when we’ve hit the point where the average Aussie can no longer afford a house, that looks to be in doubt. We’re basically at a point where a huge amount of our disposable income goes into property… so property prices need to fall or wages need to rise. But if wages rise we get inflation and high interest rates… In other words, there’s likely to be a crash, and it’s unlikely to be pretty… and this is something made inevitable by government policy settings.
There’s another, more subtle issue here. Australia has no shortage of land. Even if we take out the inhospitable interior, we probably have more arrable land per person than most countries on earth (Canada probably has more land in total but most of it is even more inhospitable). So it doesn’t really make all that much sense for small plots of that land to go up and up in cost (not really value) while vast tracts of other land are still available. It’s an artificial situation. Worse than that, real estate investments are not really productive, in the sense of creating new goods, services and technologies. Houses and land just sit there, and their appreciation in price is all relative… And money invested in real estate is *not* invested in science and industry and innovation. When we’re spending so much on houses, it’s ironic that we’re the only OECD country that is reducing expenditure on education. That is true even if private as well as public expenditure is considered.
A lot of Australians are feeling pretty smug these days, because their house has tripled in value. But they still have to live in it, or move to a new one at triple the price too, so in real terms their net worth hasn’t gained that much. (The irony, of course, is that it’s OK for those already on the merry-go-round, but it’s moving too fast for any new people to get on3.) They can borrow against that equity, but that’s just fueling a debt boom that is a whole other rant. But what happens when our kids finish uni and get married, and want to buy their first homes? They’re just starting out in life, and are nowhere near the median income… so the dream of home ownership looks to be just receding further and further out of reach. It’s a set of policies that has basically mortgaged the future for the present.
â€œThe ultimate test of a moral society is the kind of world that it leaves to its children.â€ – Dietrich Bonhoeffer
- ‘Negative gearing’ is allowing losses made on one investment to be used to reduce the tax payable from other sources. So if someone buys a house as an investment and the mortgage and other costs are $3000 a month and the rent is only $2000 a month the lanlord can claim a tax deducation against his/her income of $1000 a month. The hope, of course, it that although there’s a loss in the short term, appreciation of the property will mean it increases in value in the longer term, yielding a large profit when the property is sold. It’s big business, decreasing Australia’s tax revenues by something like 3 billion dollars.
- Partly because richer people can invest more, partly because poorer people pay lower marginal tax rates so tax-minimising investments are less attractive for them
- Our personal tragic story is that we thought house prices in Kenwick, the suburb we built a house in in Perth, were stagnant when we left there in 2001, and sold our house. Actually, I pushed for that against Sue’s insistence that we should keep it. Boy was I wrong. We bought it for $100,000 and sold it for about $115,000, which after agents’ commissions meant we made diddly. It’s probably worth somewhere over $270,000 now… we could have kept it as an investment or sold it, paid off its mortgage (which would have been significantly reduced in the mean time), paid off all our other debts and still had a big enough deposit to get a very nice house here. It feels like a punch in the stomach every time I think about how stupid I was… but hindsight is 20/20, and no-one was really forecasting the kind of boom we’ve seen in the past 5 years. You just have to get past this stuff, or it can eat you alive. We’ll always be poorer than we would otherwise have been… but I make good money and will continue to do so, so we go on from here… even if we have to try to buy our first house in our mid 40s and have already blown our first home buyers’ bonus.