There’s quite a few reasons why we young people don’t have a lot of respect for older generations. Climate change is the main one, but others include trashing the environment in general, normalising the ownership of nuclear weapons or overseeing the downfall of democracy globaly. But writing about the end of the world as we know it is frankly quite boring, so I’d rather write about one of the other things that old people have done to ruin our lives. They’ve manufactured a housing crisis by pushing real-estate prices to ridiculous highs.
Firstly, I’d like to point out that high house prices seem to be something of a pattern in the developed world. According to a ranking by Bloomberg Economics1, a whole bunch of the world’s richest countries are experiencing ridiculously high house prices, including Canada, the US, the UK, basically all of western Europe, and Australia. Just in the last year, Australian house prices increased by 11%2. But you know it’s a real problem when even New Zealand, undoubtedly the best of us, is experiencing a housing crisis.
To understand why house prices are so high, you have to understand this pretty fundamental idea in economics: when demand increases relative to supply, prices rise. It’s the same for housing. So what we need to know is, “why is demand for housing so high?”
The main reason why demand for real estate is so high right now is because interest rates are at record lows. Essentially, central banks all across the world lowered their cash rates in order to boost the economy in the wake of the pandemic, and commercial banks have followed suit by lowering their interest rates. Therefore, it becomes easier to buy a house because you won’t have to pay much interest on your mortgage, and hence you can take out a bigger mortgage. And if the entire country can suddenly borrow more money to buy houses, the demand for housing increases and prices rise.
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| Global interest rates have been pretty much as low as they've ever been. Source: https://libertystreeteconomics.newyorkfed.org/2019/02/global-trends-in-interest-rates/ |
Another reason, at least in Australia, for why our house prices are so high is our tax policies. These policies encourage investment in property over any other investment. Take negative gearing. Negative gearing allows you to make a loss on an investment property and deduct that loss from your taxable income, so you can pay less tax after making a poor investment. Or what about capital gains tax? Capital gains tax is the tax paid on profits made from an investment. In Australia, if you’ve held an asset for at least 12 months, you only have to pay half the regular amount of capital gains tax. This is basically begging people to invest in property. An astounding statistic that I found in the AFR is that these policies allow for over 60%3 of property investors to make a loss. The morbidly hilarious thing about this is that both socialists and laissez-faire capitalists should be fundamentally against these policies (or at the very least, against negative gearing), yet here we are...
But the government doesn’t just increase demand for housing through its tax policies. The Australian federal government, as well as some state governments, have set up first-home buyer grants and schemes. The idea is to help younger people buy their first home. And at a glance, these policies seem like a good idea - they’re helping young people enter the housing market. But just like the low interest rates, these schemes just increase demand by essentially giving people more money to spend on houses, therefore increasing prices even more.
These are the main reasons why house prices are ridiculously high, but there are a bunch of others. These include long-term population growth, Australia’s weird obsession with investing in real-estate, and the pension laws encouraging retirees to hold on to their houses4, to name a few.
So this excessive demand for real-estate has pushed up house prices. Buying a home simply isn’t an option for many young people. So what do we do?
The solution is simple: if demand exceeds supply, increase supply. So in this case, we need to build more houses. Local and state governments need to relax planning controls in suburbs and allow more apartments to be built. No, this does not have to mean that neighbourhoods will lose their character, or will have to sacrifice green spaces like parks. Take Chatswood in Sydney, for example. Housing density in Chatswood has increased significantly over the last 20 years, and if anything this has just increased its vibrancy and character. The federal government should also put some cash aside for building more houses in general.
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| This is my qualitative, subjective proof that Chatswood, as a built up suburb in Sydney, has character AND tall apartment buildings. Source: https://commons.wikimedia.org/wiki/File:(1)Chatswood_pedestrian_mall-2.jpg | | |
The government also needs to abolish negative gearing, and get rid of that capital gains tax policy that rewards asset ownership for at least 12 months (or at least reduce it for high-income earners). It is ridiculous that government policies should encourage people to invest in the housing market over the stock market. It is also ridiculous that the government supports negative gearing, a policy that rewards people for making bad housing investments. Like I said before, these policies go against both the socialist idea that everyone should have a house, and the capitalist ideal that a small government should from interfering in free markets. I’ll get onto why Australia is dumb enough to have these policies in a bit...
I’m not so sure if the government should do away first-home buyer grants and schemes. While they do increase the demand for housing, they also help young people enter a very expensive real-estate market, and that might be worthwhile.
So the solution to this housing crisis is to build more homes. Personally, I would like to see more social housing so we could tackle homelessness like Finland did5, but as long as houses are being built, supply in the real-estate market is increasing and prices are going down. Either way, it’s a win.
So why isn’t this happening? Why hasn’t the Australian government introduced a major policy to increase supply in the housing market? I think it’s because there is a significant faction of home-owners who don’t want anything to be done about the housing crisis. Think about it. It’s better for home-owners for house prices to stay high, because that way they don’t lose any money. Taking out a big loan to buy a house, only to find that it lost a significant chunk of value, can mean that your mortgage is now "underwater", and that is very bad. But about 66%6 households own their own home (as of 2019), so this is a significant (yet not overwhelming) majority faction abusing its power, at the expense of young people. Yet these are (presumably) the same people who lament about how younger generations in Australia will never be able to buy a home (60% of people believe this)7. And they don’t even have an ideological way of justifying this nonsense.
Unfortunately, there is no way to lower house prices and prevent home-owners from losing money. Call me a communist, but I like to adhere to what I call the birthday cake principle. Remember at kids birthday parties where everyone would get a slice of cake before one kid could get seconds? I think that, for the most part, it should be the same for housing.
The question our politicians should be asking is, “would you rather have some home-owners lose money because they made a bad investment, or provide young people with affordable housing options?” I know what I’d choose.
Edit 1: 06/08/2021
Some people have argued that house prices aren't as high as I make out. There is a grain of truth to their argument - after all location is a huge determinant on house prices. But in general, I think house prices prices are ridiculously high - in Sydney, house prices grew by 6.1%8 in the last quarter alone, to a median house price of $1,017,692. The fact that house prices grew in Sydney in July (by 2%)9, during a lockdown, clearly shows that something is up. But it's not just in Sydney that house prices are high. The Australian Financial Review reported in June that the median house price in the entirety of NSW just passed $1 million.
Let's look at this from a national perspective. All of the residential real-estate in Australia is worth four times our current GDP. That means that if we managed to sell a quarter of our real-estate this year to foreign buyers, we could theoretically double our GDP.
From an income perspective, the salary of the average Sydney-sider is $63,08510. Assuming a married couple who both earn the median income are both working full-time (unlikely if they have kids), their annual household income would be $126,170. If they live in the average house in Sydney and spend 30% of their income on their house, it would take them 27 years to pay for the house. We can probably round that up to 30 because I didn't calculate interest.
This is the best that the free market can do in one of the most developed cities in one of the richest countries in the world. And this is why I believe government intervention is necessary.
Something else that I could have explained is that we are currently experiencing a housing bubble. Asset bubbles are a recent phenomenon in economics where the free market fails to correct the price of an asset to its equilibrium point over time. Instead, the asset (like stocks or real-estate) rises and rises and rises. This is usually spurred by an increase in the money supply, like when central banks lower their cash rates (which we saw last year). Like a snowball the asset price continues to increase as investors try to profit through speculation.
Eventually every asset bubble must crash, but it is very difficult to predict when and by how much. Unfortunately, it is difficult to recognise asset bubbles - the dot-com boom and bust in the late 90s/early 2000s is easy to recognise in hindsight, yet many investors still made significant losses. My non-expert opinion is that at the very least, Sydney is experiencing a housing bubble. This will especially hurt our young first-home buyers because they are buying into a highly-priced market which is likely to fall at some point in their futures.
Footnotes:
1: Source: https://www.bloomberg.com/news/articles/2021-06-15/world-s-most-bubbly-housing-markets-flash-2008-style-warnings
2, 3: Source: https://www.afr.com/policy/economy/why-taxes-on-property-investors-should-go-up-20210607-p57ypr
4: This SMH article talks more about possible reasons for inflated house prices: https://www.smh.com.au/business/the-economy/the-top-5-reasons-why-house-prices-keep-going-up-and-up-20210622-p583aa.html
5: Finland is famous for its revolutionary policies on homelessness: https://www.theguardian.com/cities/2019/jun/03/its-a-miracle-helsinkis-radical-solution-to-homelessness
6: Source: https://www.abs.gov.au/articles/more-households-renting-home-ownership-falls
8: Source: https://www.afr.com/policy/economy/nsw-average-house-price-cracks-1m-20210615-p5815w
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