Pretending to care about housing affordability

ScreenHunter_1383 Feb. 24 15.46

Australia is embarking on another Inquiry into housing affordability.  In the past decade almost every government body, at every level of government, that has any function related to any aspect of housing policy, has conducted similar inquiries. With zero results.

Is it time we stopped pretending to care?

I made a submission (pdf here) to the inquiry, not because I think things will change, but to highlight the ‘big picture’ considerations in any housing policy.  You know, the ones we don’t talk about because the Overton window has been slammed shut by decades of well-funded propaganda by wealthy interest groups. Just look at the content of other submissions to see how they miss the big picture, either simply promoting their own financial interests or preserving their reputation by reiterating arguments deemed acceptable in polite company.

My main point is this – any policy that successfully reduces housing rents, and subsequently home prices, entails a massive redistribution of wealth from the richest to the poorest. I wrote the following in my submission.

At current prices Australia’s total housing stock is valued at around $5 trillion. If a policy successfully reduced rents and prices by 20% it would wipe $1 trillion of value from this market. Purchasing power of around $40 billion per year would be redistributed from the almost 6 million current home owning households and 1.8 million residential property investors, to the 2.8 million renters, along with future home buyers and owners of other non-residential domestic assets.

There is no win-win scenario. Housing affordability is almost completely a question about the distribution of wealth in society.

To understand the magnitude of potential redistribution from successful policy to improve housing affordability, a reduction in housing rents by even as little as 10%, would lead to possibly the largest redistribution of wealth from the richest to the poorest in Australia’s recent history.

Politically it makes sense to pander to the majority. And while the majority of households still own their own home, absolutely nothing will be done to reduce rents and home prices. Even the ridiculous fig leaf of the First Home Owners Grant is actually a subsidy to existing home owners. It’s the most fantastical piece of doublespeak to not call it what it really is – the Current Home Owners Grant.

This is the elephant in the room on housing policy.  Here. Right here. I’m pointing at it.

Watch me be ignored.

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Comments

  1. Bravo! You are a brave and very intelligent young man and I wish Australia would have had more of your kind.

  2. “There is no win-win scenario.”

    This is the key quote – and the main reason why we’ll stick with the status quo for some time yet.

    Great to see you put in a submission though – and despite being a recent home buyer I absolutely support you views and would be very happy to see house prices decline over coming years.

    • This is a structural problem that has been created over decades, and can’t be solved in one fell swoop. Not only is it damaging, it’s also unfair.

      As such I think the closest we can get to a win-win scenario is to aim for real reductions in house prices, rather than nominal. If house prices grow slower than CPI (but still above 0% nominal), over subsequent decades, with rapidly increased supply, the redistribution of wealth will occur while minimising the wealth reduction of existing home-owners.

      Unfortunately, this requires coordinated effort and commitment from several levels of government.

  3. darklydrawlMEMBER

    “Clarity about what housing affordability means as a social policy goal is necessary”.

    An excellent point. Much of the time they are looking for answers without even understanding the question!

    Most impressed with your submission. Please keep us posted on any progress. Well done.

  4. Well done, and obviously you put a lot of work into it. And of course it will be ignored.

    Darklydrawl, they’re not looking for answers at all. Where did you get that idea from?

    • darklydrawlMEMBER

      hehehe… Oh this is all so true. Very “Yes Minister”, but also very correct. Thanks for reminding me 🙂

    • Just read it. A tour de Force in spruikavillia and lacking any analysis for their reasoning.

      Andrew Wilson would be proud.

  5. “Politically it makes sense to pander to the majority. And while the majority of households still own their own home, absolutely nothing will be done to reduce rents and home prices.”

    There are plenty of home-owners who have children and grandchildren and aren’t solely focused on their own greed.

      • Not those that know that:
        a) All boats have risen with the tide
        b) The only way they can access the increased value is by going into (more) debt
        c) Their own kids cannot get a start or need to go into ridiculous debt risks to do so

        Then again, the above mindset is probably a minority group.

      • “Any they’ll all tell you they want house prices to fall – just not their own house…”

        Speak for yourself – I speak for myself when I say that I own a house and I’d like house prices to fall massively.

      • AB – as I noted in my earlier post – I do own a house (well actually just a mortgage) – and I would like to see all house prices fall (my own included). It’s also great that you share the same view.

        But that doesn’t change my point, which is that we hardly represent the majority – and I’d argue that the reality is that most people don’t want the price of their own house to fall.

      • I am another person who owns a house and would seriously like to see house prices to fall. My house is not my retirement plan – I have investments for that. I am hopeful that I will never buy a property worth less than my current place (e.g., if/when I move into a retirement community it will be an upscale one at least as expensive as the family home). If house prices fall then whereever I move to after the current house will also be cheaper. A fall in house prices will leave my kids with a smaller inheritance but well before then (I hope) they will have benefitted from more rational house prices.

      • 5. The affordability of home ownership is better now than any time in the past 10 years.

        Ummmm… really?

      • Yeah, really. I wrote about it last year. It’s just the time in the cycle we are at. Home buying is only 50% more expensive than renting on average. That is historically very low.

        And rents are historically about the same share of household income (see the first panel of charts).

        Therefore home buying is relatively more affordable (compared to renting) now than any time since 1998.

        http://www.macrobusiness.com.au/2013/05/melting-towards-the-bottom-of-the-housing-cycle/

        I have a couple of follow up posts to elaborate in the points I made in my submission. Stay tuned.

      • Andy,

        Don’t get excited by the concept of affordability.

        Affordability depends on interest rates. Housing at lower prices and higher interest rates could be equally affordable without the risk associated with high levels of debt.

        As interest rates are currently being driven down by a range of policies that are not in the interests of the nation, there may be a very high price to be paid for the ‘affordability’ that some prefer to focus on.

      • Thanks @rumple I see what you mean by that comment now and look forward to the upcoming posts on it.

        Like @pfh has said the risk of higher interest rates in the next few years (ignoring the unfortunate low probability of this) coupled with record house prices, low/no wage growth, poor job security, etc, does not equate to affordability in my book – quite the opposite actually. Still, I like the fact you are questioning the very definition of affordability. Cheers

      • Dunno.
        ‘Home ownership affordability is better than any time in the last 10 years’ is a pretty weak statement. Kind of like ‘most generous rations at Stalin-era Soviet gulag’.

  6. Catherine Cashmore

    “Pretending to care about housing affordability” Would apply that statement to 99% of people in the industry I know. They care, just so long as prices don’t drop. Keep up the good work.

    • So true Catherine. I remember sitting in a room with a heap of mortgage brokers a year or so back and they were going butcher’s hook at the local valuers and how they were ‘stopping all of their deals’. No doubt if the deal went through and the borrowers got into trouble with the bank selling up the brokers would lay the blame at the valuers if there was negative equity.

    • Catherine I note in your submission that you stated Home Loan Experts were in favour of abolishing negative gearing. Their submission actually states the opposite that it should stay. Unsurprisingly. Good summary though.

  7. Great article and submission. Unfortunately those that benefit disproportionately from the system are both unable and unwilling reform it.

    The only way change might come about is if there is a major crisis that breaks the hold of the vested interests. This might then create the opportunity for reform.

  8. To make affordable housing a social objective is to undermine the raison d’etre of capitalism. How does one share in the capitalist dream if not through the aspiration to become landlords or traders of financial instruments, earning passive income ? The hard graft of real economic production is for other people to worry about.

  9. Heeeeeey…. if you make the government provide clear goals around housing affordability, then they won’t be able to squirm around it! Tricky little bugger!

    Good luck with that.

  10. Failed Baby BoomerMEMBER

    Rumplestatskin,
    Well done and thank you for your very good submission. I hope that it is noticed and it carries some weight in the inquiry.

  11. Awesome write up & submission!

    Hey did anyone read the submission from the “Home Loan Experts”.. it kind of reminds of the Ali G movie where they describe themselves as “Wee iz de expertz”.. Each argument they raise is in complete opposite to theories outlined on this web site.

    Can only hope the people reading biased submissions see straight through the lies!

  12. What annoys me if investors wish to speculate, then use the stock or currency markets. We all need to live somewhere and housing just should not be a ‘financial’ asset. Not sour grapes – I can afford to buy but choose not to at the moment. Just disagree with where we are headed as a country.

  13. A quick comment on your recommendations:
    1) Agree. Without clear policy goals we are paddling hard without a destination.
    2) Agree. Tax should encourage productive use of land, not discourage its sale/transfer.
    3) Agree tentatively. Would you reinstate the indexation of cost base? I guess you could argue that bank interest is taxed, even the proportion that is making up for inflation, so it’s more equitable without indexation.
    4) Agree, but not for reasons of housing affordability because I don’t think it will have much impact on prices.
    5) Disagree. This would cut FHB’s out of the market more than “high risk investors”.
    6) Disagree. This is a market-distorting proposal and would encourage tenant turnover (don’t renew lease, then find new tenant at an increased rate). Also prevents landlords from increasing rents in line with actual cost increases (rising interest rates, council rates, maintenance costs, etc.)

    • Regarding 6) I’ve discussed this in more detail int he past.

      http://www.macrobusiness.com.au/2013/09/rent-control-as-a-social-bargain/

      Yes, the intention is to prevent landlords increasing rents in line with costs. You know, so housing is more affordable 😉

      In a post for tomorrow I cite some research explaining how controls on rental increases need to be coupled with security of tenure for tenants to avoids the situation of kicking out tenants to put rents up.

      For example, if we enact a rule that say rents can only be increased by CPI once per year from today onwards, and that you can only evict a tenant if they have a major breach of contract (otherwise the default is for their lease to roll over for up to some maximum limit, say 10-15 years). Current tenants who stay put will ‘intercept’ if you will, the rent over time that would have otherwise gone to the landlord if the CPI+eviction rules were not in place.

      • That sounds horrible. It’s distortionary and not in a good way. It could push investors into loss-making positions through unforeseen cost increases that they can’t recover. It would discourage landlords from making improvements to their properties. It would discourage workforce mobility as renters try to hang on to their artificially low rents. It would encourage evictions for minor infractions. It would discourage the renting out of a property for a short time with the intention of the owner to move back in (eg for a 2-year overseas work assignment) for fear of not being able to get the tenant out.

        Thanks but no thanks.

      • “Yes, the intention is to prevent landlords increasing rents in line with costs. You know, so housing is more affordable”

        They can’t do this anyway. The rental market actually functions like a normal market, unlike the market for housing to buy. Rental prices are determined by supply and demand, not by costs incurred by landlords. If the market could bear higher rents, then the rational landlord would have already increased the rent.

        That’s why we have a nation where the majority of landlords are negatively geared, where the cost of providing housing services is less than the revenue generated, because they don’t care if revenue doesn’t cover costs because they’re expecting a capital gain.

      • “It could push investors into loss-making positions through unforeseen cost increases that they can’t recover.”

        They can’t magically recover unforeseen costs via rent increases even under current arrangements. They are already charging the maximum.

        “It would discourage workforce mobility as renters try to hang on to their artificially low rents”

        So? Ripping off the renter workforce so they are more mobile is a good thing? Making their housing cheaper if they stay in one place is bad?

        “It would encourage evictions for minor infractions”

        Well, landlords can’t just decide on evictions. They usually need a magistrate to order it. All we need are fairly clear boundaries (even if established over time through court rulings).

        “It would discourage the renting out of a property for a short time with the intention of the owner to move back in (eg for a 2-year overseas work assignment) for fear of not being able to get the tenant out.”

        Sure, if you read my link I addressed these types of things, and the usefulness of a short-term alternative contract that could be used under certain circumstances. But this isn’t a big problem.

      • “They can’t magically recover unforeseen costs via rent increases even under current arrangements. They are already charging the maximum.”
        I’ve done it. When interest rates were going up, I increased rent above the odds. Told the tenants I was passing on half the interest rate increase, which was true. No complaints from them. When rates fell, I gave no increase for 18 months. Everyone was happy. But that’s just in the short term. In the long term, rents will be pushed up if costs are increased just by market forces.

        “So? Ripping off the renter workforce so they are more mobile is a good thing?”
        Charging market rates isn’t ripping off. Forcing supply of a product below cost is ripping off.

        “Making their housing cheaper if they stay in one place is bad?”
        Yes if that staying put results in a weaker economy.

        “Well, landlords can’t just decide on evictions. They usually need a magistrate to order it. ”
        Currently they can cancel lease agreements, voiding the contract, for relatively minor breaches. Yes, it takes a magistrate to order an eviction but once the lease is canceled the court has little discretion, they have to grant the eviction.

        “All we need are fairly clear boundaries (even if established over time through court rulings).”
        So the tenant can deliberately be late with rent, etc, so long as they are within the boundaries, without fear of eviction? Greeeeaaattt…
        Also, landlords can make life very uncomfortable for bad tenants.

        “Sure, if you read my link I addressed these types of things, and the usefulness of a short-term alternative contract that could be used under certain circumstances. But this isn’t a big problem.”
        With your proposed ‘solution’ no landlord would offer long term tenancies, everyone would be on 3 month leases. Hardly a positive for tenants.

        Anyway, it’s all moot; the proposal will never get picked up and its extreme nature may cause your entire submission to be thrown straight in the bin, which is a shame because the first 3 or 4 suggestions have merit.

      • @DMc You have long term leases and rental controls on commercial properties. Doesn’t seem to distort anything…

  14. I can’t wait for Leith to tear this submission a new one. There’s just so much wrong with it. Just a few points I can think of:

    -Why would you think that reducing rents will reduce home prices? Investors clearly aren’t concerned about rental returns, they’re interested in speculative gains. Increasing the supply of properties for rent will reduce rental prices, just as increasing the supply of homes for sale will reduce home p[rices.

    -The assertion that rents have remained unchanged is far from concrete, the census data tells a completely different story (that rents have increased significantly since the mid 2000s)

    -Why on earth would you expect rents to increase commensurately with home prices if supply was constrained? They’re constrained by two completely different things, the ability to take on debt, and income. All rents growing at a slower rate than prices shows is that incomes have been growing at a slower rate than loan size. And as for the large number of undeveloped but approved lots, maybe the reason the approved lots haven’t been developed is because high charges and lack of infrastructure is making development commercially unviable.

    -“If developers were able to charge higher prices when their costs increase, they would charge higher prices at any time, even if their costs didn’t increase.”

    The whole point is developers can’t charge higher prices when their costs increase. Those with fat margins take a hit, and the developments at the margins simply do not go ahead. Supply falls. Why do you think the size of lots suburban lots has dropped by so much over the last 10-15 years? Why do you think lot supply in Sydney completely collapsed over the last decade. A city of 4 million people and population growth in the hundreds of thousands per year saw lot production fall to around 2000 lots per year. You don’t think development charges of $150k per lot and extremely constrained release had anything to do with it?

    • You are onto it.

      “…..You don’t think development charges of $150k per lot and extremely constrained release had anything to do with it?……”

      I believe Rumples DOESN’T think that has anything to do with it, unless he has changed his mind since the massive debates we have had on MB about it. It is Rumples major blind spot in my opinion – it is a darn shame because he is so intelligent and makes such enlightened arguments about so much else. He is offside with the rest of the MB writing team on this point.

      Somehow he seems to actually think that sections would be the same size and the same price anyway, in the UK even if they didn’t have their Town and Country Planning system; in Oregon even if they didn’t have a UGB; in Seoul even if they didn’t have a Green Belt; in Vegas and Phoenix even if their growth had not run up against government owned land holdings; in California even if they didn’t have Spatial Plans and Rural Zonings surrounding cities; and in Australian cities even if they didn’t have strictly planned releases of quotas of land. The reduction in size of sections and the inflation in their prices “would have happened anyway” due to “demand” and “credit” and “cultural changes” and “greedy developers” and tax policies and everything under the sun except the disruption to the process of “supply” that merely coincidentally occurred precisely as the changes in demand, culture, etc happened that “really” caused the shift in market behaviour.

    • “Why would you think that reducing rents will reduce home prices?”

      Really? Prices are capitalised rents. Sure, investors expect growth, so they subtract the expected growth rate from their cap rate in order to get the value.

      “The assertion that rents have remained unchanged is far from concrete”

      I didn’t say they were unchanged. I said their share of household income is unchanged. Couple that with larger houses, lower occupancy etc. and there is no justification to scream ‘affordability crisis’ in the rental market – unless you believe this has been the case for >25 years.

      “Why on earth would you expect rents to increase commensurately with home prices if supply was constrained?”

      Umm. Really. Again?

      “Why do you think the size of lots suburban lots has dropped by so much over the last 10-15 years? ”

      Because town planning regulations have allowed it.

      “You don’t think development charges of $150k per lot and extremely constrained release had anything to do with it?”

      I’d like some evidence of that claim. You seem to have sipped in an extra $100k+ there.

      Sure, some developments don’t go ahead. What’s your point? If a developer goes broke the receivers will flog off the site to the next guy. It doesn’t disappear.

      • “Really? Prices are capitalised rents. Sure, investors expect growth, so they subtract the expected growth rate from their cap rate in order to get the value.”

        Sure, in a fantasy world where all actors make perfectly rational decisions, that may be the case, but you can’t honestly think that decisions in the real economy are made that way.

        The typical Australian housing investor is not doing the maths, they’re making decisions based on a combination of previous experience, personal anecdotes and media spruik.

        “I didn’t say they were unchanged. I said their share of household income is unchanged. Couple that with larger houses, lower occupancy etc. and there is no justification to scream ‘affordability crisis’ in the rental market – unless you believe this has been the case for >25 years.”

        My mistake, I meant to say their share of household income. Never the less, using the census data, their share of household income has risen substantially over the last decade.

        “Why do you think the size of lots suburban lots has dropped by so much over the last 10-15 years? ”Because town planning regulations have allowed it.”

        What, so it’s a market response then? People would rather live on a 400 square metre block of land than an 800 square metre one?

        Lot sizes are falling because developers (and new home buyers) are being forced to economise on an increasingly scarce and expensive resource.

        “Sure, some developments don’t go ahead. What’s your point? If a developer goes broke the receivers will flog off the site to the next guy. It doesn’t disappear.”

        My point is that if fewer developments are going ahead as a result of high charges, then high charges are quite clearly reducing the supply of housing, and reducing the supply of housing is going to increase the price.

        The point is less about developers going broke, rather, the higher the taxes and charges, the more sites you’re effectively quarantining from development by making them uneconomical.

      • And share prices are “capitalised earnings from dividends” too…..YEAH, RIGHT…..!!!!

        Arescarti42, you are definitely making sense here…….

  15. The powers that be are pumping this thing all the way up property will keep going up and up and up until one day it doesn’t.

    Me and 90% of my friends are priced out of all property i would consider useful to own in the long term.

    increase land supply and let people build instead of choking supply to shore up prices.

    Tinfoil hat on: I bet the government builds a bunch of useless crap like school halls and tunnels with the workers from the capex cliff instead of affordable housing gotta protect the high prices and rebalance the economy.

  16. @Rumples good work on general arguments, especially on the need for proper definitions and frankly there is not much in Section 2 I would disagree with. However, which is very unfortunate, you have jumped to a conclusion too quickly…

    In particular, owner occupiers are the primary price setters not investors… I know, I know NG, concessional CGT etc… so it’s easy just to “assume” they are the main culprits but the truth is that these measures allow investors to compete in the market on equal grounds with owner occupiers – just run the figures as per Attachment with one more case of owner occupier to compare…

    All in all, your own analysis supports the argument that if you remove “concessions for investors” you will price them out of the market. And the consequence of this will be….? Exactly, mostly unpredictable. I would argue there will be no fall in prices. The most likely scenario is that upgraders will move in and deplete the stock of rental accommodation in city centres – rents in the city would skyrocket as renters are pushed out to the suburbs… It is possible that the market would find a new equilibrium where rents are so high that it starts to attract investors again… and round robin we go…

    The whole point is that we understand so little about the dynamics of the property market that drawing too hasty conclusions can do more damage than good (please don’t take it as a criticism of your submission but rather as a general comment to all commentators).

    • Good comment.

      “All in all, your own analysis supports the argument that if you remove “concessions for investors” you will price them out of the market”

      Yeah, that’s right. But you know what. The more I considered the problem, the more I realised that home buyers are paying the price set by investors. If investors were willing to pay less, home buyers would pay less as well.

      I mean just look at Sydney! Leith has been reporting that the current price boom is almost exclusively driven by investors.

      Rents don’t have to be ‘high’ to attract investors. Investors will pay whatever the discounted value of future rents happens to be.

      I agree that we don’t know exactly what will happen. Major policy and transitions like this should be implemented slowly. After all, there is a lot of leverage in the system.

      But we need only look abroad to discover what might happen.

      If there is one thing I’ve learnt, it’s that markets are very durable to change. The whole idea that the markets won’t function if we squeeze sellers is complete nonsense.

    • It is necessary to leap to contorted conclusions about how the property market works when you are completely agnostic about the role of “supply of land for various uses”.

      Alan W. Evans describes how many economists remember hearing back in a class called “land economics 101” or something like that; that some dead economist of the 1800’s stated that “supply of land is fixed, therefore only demand matters”. Either the topic was not well-taught enough, or they weren’t paying attention to the many provisos and developments of the basic theory.

      Of course “the supply of land is fixed” just as the earth only has so much of every resource. But this does not mean that “only demand matters” for the price of every resource, and it does not mean that the supply of land IN EACH USE is “fixed”. There is actually a lot more land that COULD be applied to each use, including farming and forestry, and most definitely including urban development, which only takes up around 1.5% of land use globally and much less than this in Australia.

      The determinant of the price of land in each use, in free markets, is the “next highest bidding use” of that land. This is why developers in Texas actually obtain land for $10,000 per acre to build new suburbs on; and “option values” mean that even maturely sited land in the city can cost less than $100,000 per acre. In contrast, everywhere that there are regulatory interferences in supply of fringe land, the price of fringe land is bidded up by developers to at least 20 times as high a price as otherwise.

      The same thing would happen with the price of land for producing milk, if planners restricted the supply of milk for a city to exactly the right amount that could be produced on exactly the right amount of land adjacent to the city. The price of milk would go up too, and people would not stand for it. Why do they stand for it in the basic necessity of housing?

      This all comes back to understanding “economic rent” properly. There used to be economic rent in everything produced on the land, because primitive transport systems meant that the supply of milk was indeed only what land immediately adjacent to the city could produce. This meant that as incomes rose and people bidded against each other for milk, the owners of milk-producing land got richer. Hence Karl Marx calling for nationalisation of land and Henry George calling for land value taxation.

      We seem to have completely forgotten that economists in the classical era were not merely talking about “economic rent” in land as it exists today – which is merely a matter of premiums for location efficiency and transport cost savings. People are NOT having to out-bid each other to get a share of a basic and supply-limited necessity. Food and natural fibres and timber and so on is sold on a “cost plus” basis in competitive markets and there is no “economic rent” embodied in the price at all – just a cost of transport which is so low that it is all netted out anyway into a “one sale price for everywhere” by the major distributors.

      There is NO REASON that supply of new housing cannot be the same, and no reason apart from rentier greed for perpetuating what is effectively the restoration of Victorian Era monopoly rent into the cost of a basic necessity.

      • Yes, so much of Rumples submission, appears driven by a fundamental difference of view on this issue.

        The result is a mixed bag, discussion which is dubious and debatable in part but the end result are some sensible recommendations – 2 and 3 in particular.

        Recommendation 1 is reasonable insofar as the concept of affordability is a mess and should be abandoned – especially with current abuses of monetary policy and the impact of interest rates on ‘affordability’.

        Recommendations 4 and 5 are the recommendations you resort to when you simply refuse to counternance what clearly should be recommendation 1.

        Namely, a massive relaxation of the rules regarding the permissable uses of land both in the inner urban areas and on the outskirts. Note: not complete removal – simply a massive relaxation such that any farmer may convert unremarkable farmland to urban uses, if they so choose.

        For me Rumples blind spot is demonstrated by his refusal to recommend something that he believes would be at best be ineffective. If that is the case what possible objection could he have to relaxing the rules regarding the permissable uses of land.

        What is so important about maintaining complex, costly and unecessary regulations relating to the permissable uses of land?

        Hmmmmm – perhaps it gives meaning to the business of town planning. Afterall, prior to the introduction to complex systems of zoning, town planning was a fairly pedestrian affair – reserve some parks and transport corridors and maybe a historic house or two (as against entire conservation precincts).

      • Touche, Pfh007:

        “……What is so important about maintaining complex, costly and unnecessary regulations relating to the permissable uses of land?…..”

        IF they make no difference anyway…….? Section sizes would have shrunk anyway, people would have flocked to living in apartments anyway, etc etc.

    • @Rumples: “The more I considered the problem, the more I realised that home buyers are paying the price set by investors.”
      Fair enough but what in particular led you to this conclusion? I am genuinely trying to understand the logic because my considerations led me to a different conclusion. Just to share a few questions that I struggled with:
      > owner occupiers are still dominating the market so why the minority would drive prices?
      > Proportions of owner occupier dwelling is almost the same for the last 50 years (71 to 67%) yet we experience only recently the boom in investment properties (and it did not change those proportions dramatically), why? Investors did not drive prices in 60’s, 70’s 80’s so why would it change now? Did the profile of property investor changed?
      > It made more financial sense to upgrade owner occupied property than buy an investment property (definitely less hassle!) in the past (before concessional CGT and 100% leverage loans were available) so why so many pile into rental market services business now? Is it possible that this is because both options now offer similar returns?

      Agree on durability of changes. Hence my point is to make changes to things that will make a difference, but this requires better insight than anybody at this stage can offer. Property market dynamics is a grossly under-researched discipline in my opinion. Too many “sure things” that “everybody knows are absolute truths” that do not make sense under closer scrutiny.

      @PhillBest The field of economic geography remains at peripheral of conventional theories and is mostly underdeveloped discipline but it could explain a lot regarding property market (which is primarily a spatial problem).

      All in all, if we “do know everything” why explaining why prices are what they are and where they are heading is so difficult? My point is that we are focusing on wrong factors and looking in wrong places for the answers…

      • “…….The field of economic geography remains at peripheral of conventional theories and is mostly underdeveloped discipline but it could explain a lot regarding property market (which is primarily a spatial problem)…….”

        Actually it was developed to WAY ahead of where the mainstream is today, by the 1970’s – but everything we knew by then has been let slide. It is kind of like the loss of knowledge that famously occurred in the Dark Ages – about how to make glass, for example.

        The best thing you can get hold of is a 1970 paper by Michael Goldberg called “Transportation, Urban Land Values, and Rents: A Synthesis”.

        I agree that the theoretical basis should have been developed further still from the point that it was at then; however it does not help that we don’t have a clue about stuff that was once common knowledge even to non-specialists like architects, social reformers, and car makers. For example, a 1905 booklet by the architect Raymond Unwin entitled “Nothing Gained by Overcrowding”; leaves modern-day economists for dead in its grasp of the subject of economic land rent.

  17. This would be my submission – not sure it would get accepted as probably defamnatory of banks and real estate agents – the real enemies of the real estate bubble! But this is what I see on the ground. Worthy submission???

    I believe that the root causes of the severe housing unaffordability currently seen in Australia are that buyers are willing to pay more than fair value for properties due to the following 4 reasons:

    1. Financial institutions push higher levels of mortgage debt onto unsuspecting prospective buyers in order to maximise credit growth/profits

    2. Real estate agents act for vendors/themselves and pray on vulnerable buyers to pay more

    3. Buyers don’t have adequate financial education to be rational and stop #1 and #2 from happening

    4. Governments have created several tax-driven reasons to invest in property when it wouldn’t make sense otherwise and appear to do everything they can to push prices up

    My recommendations to solve these 4 causes of lack of housing affordability would be:

    1. Limiting financial institutions to maximum loan-to-value ratios of 70% (as is the case in other parts of the world where housing is more affordable such as Germany). Banks use the Henderson Poverty Index (HPI) to calculate (and pump up) how much you are entitled to borrow without informing you just what it means to live on the HPI, while buyers believe this is a ‘safe’ amount to borrow. Reducing the banks’ ability to lend excessively has a dual purpose of protecting the sheep from the wolves (the credit pushing banks) and from themselves (naive or greedy customers wanting more).

    2. Real estate agents should be regulated to the same extent as financial advisors, as they are essentially providing financial advice to young people on the biggest transactions of their lives. Too often have I heard real estate agents say to naive young people, “what’s another 10 or 20 grand when you know the property will double in value in 10 years” or “you can’t lose on this house” which are irresponsible and reckless statements used to coerce young buyers into making life changing transactions. This behaviour could be curtailed by treating real estate agents as financial advisors.

    3. Lack of financial education and deliberately complex messaging from financial institutions contributes to the problem. As seen recently in a Digital Finance Analytics survey, almost 40% of highly leveraged borrowers mistakenly believe that mortgage insurance protects them! Most people have unwavering faith in property markets always going up just because this is the way that they have behaved in the past 30-odd years in Australia and the stories that baby boomers have on how they made easy money on property, with no consideration of fundamental analysis. The fact that both banks and real estate agents can so easily manipulate people to pay more and take on more debt demonstrates that prospective buyers don’t do the maths, don’t understand economic concepts such as opportunity cost and are easily lured by fluffy sales propaganda. Our education system needs to teach people the financial tools to avoid being tricked by vested interests.

    4. The Government needs to tip the balance of tax incentives away from housing speculation. The most obvious driver of housing speculation is negative gearing and the 50% CGT discount, whereby investors are willing to take a poor rental yield on the blind faith that they will get high capital growth. The shortfall in yield (i.e. interest expense being greater than rental income) is tax deductible and the capital gain is only assessed at 50%. These measures create a perception that the Government will underpin their investments with favourable tax treatment. While I acknowledge that both the negative gearing and 50% CGT discount are available on other investments such as shares, it is much easier to be heavily leveraged into property than it is with shares (margin lending on shares has a max loan-to-value ratio of 70% vs investment property of 90%+) and people feel much more comfortable doing so. A return to CGT indexing and scrapping of negative gearing will help address the imbalance.

    I hope that the Committee will take some kind of action so that the next generation can pay sensible income multiples for housing (3 to 4 times household income), which will free up capital which can be used for productive purposes and improve the quality of life for all Australians in the process.

    • Good for you, just send it.
      As long as a sub makes sense, which yours certainly does, they are bound to accept it.
      If you make a sub and it is not published, please make a comment here on MB a month after the cut-off date.
      I made a sub as anon, ironically including quotes from Saul Eslake and Senator Bob Day before their subs were actually published.
      Give the Senate the message twice, why not?
      I thought the Inquiry would be receiving thousands of subs.
      How wrong I was.
      What has lead to such a pervasive, passive ‘I’ill wait for someone else to make a submission’ attitude?

  18. A wonderful short summary – almost short enough to keep the attention span of an idiot party politician…almost.

    High house prices flow into all areas of uncompetitiveness that we see and have embedded inequality and unfairness in our society.

    Speculators (investors) of established houses are price setters, and they are also pure rent-seekers, they add nothing to society or the business economy, they have no place in the market.

  19. Free_Market_Delusion

    As I roll on the floor laughing yet again.

    Nothing will happen they barely understand the situation let alone the vested interests being the primary driver of everything.

    There is no political will what so ever.

    Politics is now about 3 to 4 word slogans:

    Stop The Boats
    We Are Open For Business
    No more hand outs
    etc etc etc

    Its no different to environmental issues, I was environmental scientist but have since given up on the
    entire industry and concept because those with any real power to do anything don’t actually give a stuff.

    Housing affordability is an oxy moron when its one of the (unfortunately) most important asset classes we have left.

    Apologies for extreme cynicism I’m just over it and powerless to do anything about it.

  20. The frustrating thing about this piece is that it’s completely and logically correct. Yet it doesn’t matter. No matter what is said on here, the clearance rate keeps climbing, the house prices keep surging and the investors keep buying and selling from each other and creating more and more paper profits. There is NO WAY the government will ever, ever, EVER do anything serious about housing affordability. They will quote rubbish about creating g cheaper rents for the seriously disadvantaged, which is great but simply a token effort. They know but chose to ignore that affordability is a problem across the demographic. The widening chasm between the have and have nots. Although it’s obvious, it’s clear it will never change:
    – it would mean the solvency of Australian banks would be screwed. And all the banks are underwritten by the public balance sheet. The only reason why the Australian banks are AA- rated is because they have an unwritten guarantee from the AAA rated government. And the government is AAA because the banks are AA rated.
    – it would mean their moral majority (the ‘haves’ who all pat themselves on the back for being so smart they bought yeaaars ago) and their voting bedrock would feel a little less smug and a little less ‘wealthy’
    – they know a house price fall would turn into a rout because the whole ponzi is built on sand
    – a house price rout makes a very ugly economy and an ugly economy means an unpopular government
    – they have a 4 year term and don’t care what happens beyond that, who cares if inflating bubble today makes the mess worse when it pops.

    Sorry guys. No matter what we say on here, how theoretically correct it is doesn’t and won’t make a lick of difference.