It is not just economics

Some days I get some very nice messages from readers, other days I don’t. Friday was one of those “other” days. An excerpt from my inbox after a run through the abuse filter.

When will you renter losers just accept that you are wrong and that housing isn’t going to crash. I am sick of people like you constantly talking about a “bubble” in housing trying to cause a crash. You were wrong, you missed the boat and are now jealous of others success. You and your doomsayers have been telling everyone that housing is about to crash for years yet guess what, it never happens and it never will because the government will not let it happen. Do yourself a favour, buy a house and stop whining.

I have always found it odd how overly passionate people are about housing in comparison to other economic topics. I also find it amusing that people’s assumptions about my own personal circumstances lead them to wrong conclusions about me. But that is another story for another time.

The thing that I take away from these e-mails ( yes, this is not the first one ) is the strong belief these people seem to hold that you couldn’t possibly want to discuss the downside risks of house prices or the potential risks of property speculation unless you would in some way have personal gain from doing so. My assumption is that this breed of human only think about housing in terms of personal gain and therefore do not have broader understanding of the risks and issues housing creates for the economy and social well-being of Australian society.

All of the members of this blog talk constantly about the systemic risks caused by the massive credit binge into housing that Australia has created for itself. In my opinion it is a massive macro-economic blunder that has wasted the best opportunity for economic prosperity that Australia has had in the last century. I am still very doubtful that the economy can correct itself out of this mess without falling in a heap. I get the feeling that the nation will collectively be sitting around in ten years time looking back saying to itself “what the hell were we thinking”. This issue is something I personally have talked about at length , but I know that my fellow bloggers share the same frustrations.

But there is also another side to this, something that isn’t economic. It is a social issue that until quite recently has been below many people’s radars. It has been festering for years but I get the feeling it is going to become a big political problem over the course of this year as the housing market slides and the government is forced to make a decision about what to do about it. Let it go or intervene yet again.

There has been a long running debate about the “real” cost of housing and how today’s price to income ratio compares with history. I am not going to rehash the discussion as it is well known. But from my personal view point I don’t really have time for any debate on the issue. I have my own life experience to know that houses are far more expensive today in real terms than they were even 15 years ago, and due to this I have real empathy for young people who have massive societal pressure to purchase houses. I am not sure it is appreciated by older generations just how much pressure there is on a young person in Australia to purchase property. But nearly every week I receive at least one e-mail from a reader that is just like this example.

Thank you for the good work on your blog, and keep it up. I discovered Delusional Economics in about August last year. I had been under some pressure from family and friends to buy a house for about a year, but whenever I looked at the numbers it didn’t seem to make any sense. I began to feel like the rest of the Australia was taking crazy pills in regards to real estate. However the implications of claiming to be the only sane person in a room full of lunatics were not lost on me. It was certainly a relief to find some considered contrarian analysis on the topic from yourselves and Lewellen-Smith, van Onselen etc. to back up the opinion I had formed about our housing markets. Particularly as I’m an engineer, its good to see some trained economists saying some of this stuff!

I’ve since been using your blog to help make my arguments against buying real estate to family and friends, and have had some considerable success in persuading them of the risks. Please keep it up!

I looked back through some records last week to check a few figures. In 1998 I purchased a house that cost me 3 times my gross salary at the time. Today if I was still in that job I would be earning 140% of that salary, I know this because I am still in contact with the company I worked for then and I asked then recently what they are paying people in that position. The house however has increased in value by 230%, I know this because it recently sold for that amount. A house I purchased in 2001 sold for 300% of the purchase price in 2007. Let me know if you are aware of a job that kept up.

I get the feeling from some comments I have read in regards to this topic that people confuse their own career income growth with wage growth. For instance I now earn 300% of what I did when I first started working as a fresh faced university graduate. Therefore the fact that houses have gone up by 300% in the meantime isn’t a huge issue for me, especially since I purchased a couple of them along the way. However that is not the measurement that matters. What matters is how expensive houses would seem if I was a fresh face graduate today, and in that case they are hugely expensive.

Yes, there are mining jobs where graduates ( even at a high school level ) are earning large sums of money but this is not the norm. The mining industry is not a large employer no matter how much the government needs you to believe it is. ( Given they gave away an additional $60-$100 billion dollars in tax receipts). A university graduate at my work earns about $40,000 in their first year and around $65,000 by the third year ( before tax which includes a HECS debt ) . I am sure many would consider that a generous wage. However the median house price in my city is $430,000. You can see the problem. Just to save up a 10% deposit quite literally takes years even when living at home with mum and dad. Older generations can rant on about young people wanting everything instantly and not knowing how to save. This is in fact a fallacy, but it misses the point that it was never that hard for them to obtain a property, I know because I am one of them.

As many of the bloggers on this site have talked about, government policy in support of housing is no longer providing equitable outcomes. It is quite clear policies such as negative gearing and first home buyers schemes are simply pushing prices ever higher and further out of reach of the younger generations. This may not have been the case when these schemes where first introduced, but after a decade long credit binge that has now pushed housing into the stratosphere the last thing younger generations need is government policy keeping them there. It may keep the older generations content but it is now at the expense of the young.

So now we have a situation where young Australians are being pressured into purchasing property that they realistically cannot afford at the same time the government continually introduces new policies to make the issue worse. It is no wonder that the young have had enough. As I said last week:

I am getting the distinct feeling that things are starting to change. The fact that this article made it past the editor’s desk and into print is another good first step. It may well be that there is much more support for housing policy changes than Saul and the government realises. Something that is set to continue as the younger generations become more and more political active about these policies and their inequitable effects.

Little did I know at the time of writing that article that the rumblings had already begun.