Is housing the great investment delusion?

ScreenHunter_16 Jun. 06 16.17

By Leith van Onselen

Capital Markets’ Roger Bootle has published an interesting article in the UK Telegraph asking whether housing is “the greatest investment delusion known to man”:

The worst aspect of all this [escalating house prices] is that although particular individuals become better off as a result, people overall do not. The housing market is the greatest source of investment delusion known to man. As I said a few years ago, people are encouraged to believe in “money for nothing”. As house prices go up, they are led to believe that as a society we are richer and yet if no new assets are produced, clearly we are no richer at all. On the contrary, we would be richer if a prolonged and pronounced building boom caused house prices to fall.

For this you cannot blame Mr and Mrs Average, whether driven by greed or fear. This is the result of a massive failure of public policy: tight control of building land and massive subsidies to home-ownership, combined with a lax immigration policy. I am not saying that each of these is necessarily wrong but the combination of the three has been catastrophic – wasting resources, distorting the economy, leading to misery and frustration for millions of people and diverting their energies into the zero-sum game of climbing the housing ladder.

It’s difficult to disagree with with Bootle’s views.

Forcing-up the cost of what is essentially a necessity is neither clever nor wealth creating. Sure, while some land holders are made better-off, their gains come largely at the expense of those required to take on mega mortgages or those yet to have entered the market. It’s a zero sum gain.

More importantly, the channeling of increasing amounts of the nation’s capital into pre-existing housing, and the associated high land costs, chokes-off the productive economy: the true creator of wealth.

Indeed, one of the “benefits” of Australia having one of the most expensive housing markets in the world is that it has inflated the value of our household wealth. Australians, along with our Kiwi cousins, also have a particularly high exposures to property and a low share of wealth stored in liquid financial assets (see below IMF charts).

Housing Wealth
Household Financial Wealth
Household Net Wealth

But is having the lion’s share of one’s wealth stored in illiquid housing really all that beneficial? We all need somewhere to live and higher home values serve little purpose to the vast majority of owner-occupiers, who typically must sell and buy into the same market.

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Leith van Onselen
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Comments

  1. “But is having the lion’s share of one’s wealth stored in illiquid housing really all that beneficial? ”

    I know you intended this as a rhetorical question, but I’m not sure we even need that at this stage.

    • Its all about perception, people ‘feel’ wealthy, they use their houses as atm’s and lock-in higher levels of debt.

      And the ‘growth’ delusion is maintained. The economy tick’s along and we all pat ourselves on the back.

      But at the risk of sounding utterly boring – because not many here at MB would argue against this – Australia’s housing market is one enormous bubble, and the RBA is now an entity who’s primary role is its management.

      • @ reusachtige

        Yes, but you are smart enough and experienced enough to see the wisdom there.

        There are still many fools buying in this market who don’t.

        Experience runs an expensive school… but fools will learn in no other.

      • Reusachtige,

        It’s been a bubble for years and if the Govt has their cowardly way it will remain a bubble forever getting bigger and bigger and hollowing out more and more of the real economy as it does.

        As long as it’s able to expand a bubble can go on a long time, I expected this to pop years ago (it did for most of the world) but I massivly underestimated the govts determination to sacrifice anything if it kept housing going. Now I have no idea. I expecting this won’t pop until everything else is dead and we have a recession to remember for generations.

  2. Did you hear about the man who owned a two million dollar dog? He swapped two one million dollar cats for it.

  3. Basically my views. If we as a society can better provide life’s necessities easier (cheaper) than we as a society are better off. This is why we modernize to acquire what we need easier.

    There is no need for the average australian to work 5 years+ (100% income) just to purchase 500m2 of land on the fringe of our metropolitan cities.

    What really gets me is the all too often dilusional thinking from property investors who feel they offer a service to misfortunate people who cant afford to purchase the house they rent.

    Its been a system where equity in one IP house pushes the value (ability to loan more) for the next IP property a little higher out of reach of the rentee. Virtually guaranteeing someone will have to rent their IP…

    Meanwhile wages go up, national debt goes up, ability to manufacture anything competitively for export goes down and all our labour force rushes into building houses for one another…. Thats very clever for the long term….

  4. It’s actually very easy to disagree with a view that “we would be richer if a prolonged and pronounced building boom caused house prices to fall.”

    What an idiot!

    We’ve seen this exact situation in the US and we know what happens. The owners of shares get richer and the owners of houses have their standards of living constrained in many/most case, with numerous people losing their homes through foreclosure.

    Virtually everything is sectoral. Virtually whatever happens some people end up worse of, some end up better off.

    • And thats the truth… At the very least limit where we are at so IP and the wealthy cant continue to leap frog one another using equity.

      But that all said i think its fair to say australian property will have its day regardless. So why allow its inflation until then?

      Why allow the young families to take on ridiculous mortgages? Is it feeling a little unsteady ontop of that pyramid?

    • An increase in wealth occurs at a societal level when all the cost of all things go down in real terms.

      The guy isn’t an idiot at all.

      • That’s also why deflation is really good for most people.

        It is only the banks, government and the people stupid enough to take on big debt that fear deflation.

    • look at that from different prospective:

      – before construction boom x million people own y million homes
      – after boom, x million people own y+z million homes (on average they are wealthier)

      this works if there is no debt generated on the way.

      • The Patrician

        Wow those calculations are astounding.

        I hope the nurse is checking your medication dosage calculations, doctorX.

    • arctic explorer

      “As house prices go up, they are led to believe that as a society we are richer and yet if no new assets are produced, clearly we are no richer at all.”

      Why is this argument run time and again? Obviously, at the end of the supply chain, and in a situation where there is an ever-growing number of households, the total number of dwellings increases (as we can see from ABS stats). Just because an investor buys an existing property doesn’t mean that the house-seller buys another existing property – a proportion will go on to build a new property. And investors often purchase new properties as well.

      If it was just a case of ‘musical houses’, there would be no market for new dwellings – an obvious fallacy.

  5. ceteris paribus

    Expensive housing in aggregate is indeed a zero sum game. But amongst the players themselves, it is all about big winners and big losers. And that it why, like a bloody car crash, it has drawn a mesmerised audience.

    • It ain’t a zero sum.

      There is an usury component.

      That’s purely fiscal, in non-fiscal costs, there is family formation and loss of enterprise.

  6. Housing is certainly a great investment delusion…

    But the title of greatest investment delusions???

    Bitcoin
    Gold
    Spec Mining Companies
    Derivative contracts with major banks as counter party
    FX trading – with the dealing desk playing counterparty to the trade
    Trading on margin

    At least property generates a yield…though the risk/reward of all that leverage is the great misunderstanding

    And…most of those other ones above cant bankrupt you unless you use leverage…

    • The yield fluctuates in reflection of the risk.

      Gold has no yield because there is no risk.

      Of all the currencies held in reserve by the G-20 countries, gold is by far the largest in value.

      • In Feb 1978 I bought a waterfront block of land in Gosford for 147oz of gold.

        In 2008 just before the GFC it was worth 1,125oz of gold.

        It is currently worth 500oz of gold.

        There is no doubt in my mind that in 2017 it will be worth 140oz of gold.

      • Measuring in gold is a poor method.

        How long does it take the average person on the average wage to acquire an ounce of gold? In terms of AWOTE?

      • So even with land there is an element of delusion… It just keeps up with inflation over the long haul.

        Of course this also proves that annual 2.5% inflation is a delusion, or if it isn’t then 2.5% inflation per year is way too much.

      • @Rusty Penny

        It is the only method.

        Any other method is delusional.

        Because all the currencies are measured against gold to work out by what amount each currency is being devalued.

      • A currency is a store of wealth, and it recalibrates based on the quantity of currency.

        Currency is not welth.

        The closest proxy to wealth is labour, and wealth increases when labour is able to work better,

        You oz of gold metric is meaningless if you don’t calculate how much labour exertion is required to acquire an oz of gold.

      • You may have to convince the rest of the world of your metric.

        The gold metric has been in use for 5,000 years.

      • Well we’ve been off any gold base for some time now.

        The rest of the world has been convinced.

        The greatest example of gold not being wealth, the Spanish conquering South American.

        What they did was ship the gold and silver home, and very little product (i.e. real wealth).

        All it did was create Spanish, and European inflation that killed the Spanish empire, and its’ never recovered.

        I’ll quite happily accept my definition of real wealth over the plebs and gold bugs,

  7. I believe at the heart of the problem is education (or lack thereof).

    There are a lot of reasonable and intelligent people who at the drop of a hat will recite from the “rent money is dead money” song book without questioning (or even understanding) the logic (or lack thereof).

    A big part of the problem is that “property” in Australia is inextricably associated with some kind of a get-rich-quick perpetual profit-machine, and not as the functional resource that it is.

    I also find it incredible that people are willing to leverage up to the eye-balls under the weight of a 30-year mortgage with the only research conducted in the property advertorial section of the local newspaper. It truly is ridiculous.

    *Quick question: if I’m the 2% I’m paying to rent my home is “dead money”, what’s that make the 6% that you’re paying?

    • Add to that, if I’m the 2% ‘dead money’ but also claiming 40% back in tax deduction for my business, how much better off am I now?

  8. I think there’s two sides to this.

    Housing has proved an excellent investment for many. Not only providing accommodation but in a rising market some serious capital gain. Investing at the right time in the right market can be very attractive indeed. Governments and business love a buoyant property market for all the flow-on effects from refinancing thru to renovation and requipping. Housing data is often used to gauge the ‘health’ of the economy with any downturn being greeted with despair. Generally a positive housing market is a good sign and must hold some investment value.

    Of course this is not the same as investment directed to creating businesses with production or export capacity and yes, billions are tied up in static non exportable assets – many would argue billions better invested elsewhere – nonetheless it appears the finance sector and many investors think otherwise.

    • ZZZZ.. That piece of propaganda material is sleep inducing. Minbot, Whatever you do, don’t think about switching into a marketing and sales career.

      • His last para is the good bit, but it is a freakin’ understatement.

        “……Of course this is not the same as investment directed to creating businesses with production or export capacity and yes, billions are tied up in static non exportable assets……”

        But nevertheless there is something good about it against which the above can be balanced?

        Rubbish, it is as good as a cancer in the body of its victim. There is nothing at all “good” about the cancer thriving. The bigger it gets in a patient managing to survive in spite of it, the nastier the final demise will be.

  9. ” We all need somewhere to live and higher home values serve little purpose to the vast majority of owner-occupiers, who typically must sell and buy into the same market.”

    If you buy land and build wisely, and sell into the same market, you will profit, do this in a rising market and you will profit more, Do this in a falling market, then Wait.
    All along the way you live in the homes that are built so you can take your time, you have to rent between the builds though.
    Call it what you want, it works for me.

    • I think you must be a builder to be doing that legally.

      You want the word to describe it? Building. It is a verb in this case.

      You are a builder. What you do is called building.

      • No I am not a builder, I live in the homes that are built by a builder, and I choose builders wisely, and the inclusions.

      • I bought land in 2004 and built a house with a builder, again in 2007, 2011, Last land purchase was Nov 2013, waiting now for the build, should be ready to move in Jan 2015.

      • He doesn’t mean you’re a builder as in you lay the bricks.

        He means your economic activity has been building…construction.

        Manufacturing in other words… but a protected species of unproductive manufacturing.

  10. Anchoring bias is alive and well. They figure if an RE agent and the newspaper say the property is worth “x” dollars, then its worth must be something close to that.

    People seem incapable of doing basic mathematics. They ignore the context of prices relative to interest rates at all time lows, and overlook that a 20% price increase from a base of 400k is half that of a 20% increase from 1m. As property prices march ever higher, why does it follow that a 4% annual wage increase will sustain a 4% increase in prices, even allowing for leverage?

    Unless they can afford to downsize significantly, PPOR owners do not benefit except in their minds,which is what govt and RBA hope for.

  11. I’m not sure if the guy is an idiot or not, all that I can say with any certainty is that this guy has never attended even a single Sydney backyard BBQ in the last year. Joe Sixpack is HAPPY, the wealth effect is real and the only people complaining own neither a house nor an IP.

    It is hard for me to imagine any other policy that could make almost 70% of the population happy. unfortunately many of the remaining 30% have neither a house nor a job so it’ll be interesting to see how soon Centerlink is forced to recognize the ripple down effect of this wealth (or is it actually ripple down poverty)

    Still Joe Sixpack is happy.

    • Spot on. Joe Sixpack sees his wealth as well-deserved, stemming from his hard work and considerable intellect.

      The other 30%? huh, what?

    • You neglect to mention that it was 70% of population a couple of years ago, now 66% and falling… and that the actual individuals making up the 70% are virtually the same. Entry is empirically more difficult as time goes on.

      At some point, though, probably after some of the homeowning BBs have departed, the 70% will have turned into 45%, unless there’s a crash in the meantime.

      • “You neglect to mention that it was 70% of population a couple of years ago, now 66% and falling…”

        Not to mention that at least some house owners would like to see flat or decreasing prices (whether in real or nominal terms). You can put me in that category.

      • CB is not delusional about what this all means.

        He is saying that the narcissism of the boomers.. i.e. most of the 70% limits their ability to see the other 30%+

        Just like you can’t train a chimpanzee to solve a rubik’s cube, you can’t train a boomer to think of something other than its own rampant consumerism.

        You are wasting you energy thinking this can be solved by means other than a boomers neck at the end of a blunt machete.

      • @Statsailor, of course the percentage of home ownership is falling, there would be little point in price escalation (and no economic mechanism for it to happen) if the market were in a state of housing surplus. With the creation of each new IP another GenY’er is denied home ownership. The poverty effect is rippling up from the bottom and is slowly creating a permanent underclass. Manufacturing is closing down PERMANENTLY so that their land can be recycled into even more IP’s for the immigrants and GenY’ers..

        Frankly it is beyond me how a caring socially aware (classless) Aussie can do this to his fellow Australians. This is not an example of Aussies giving each other a “Fair-Go” matter of fact it’s the antithesis of fair go, Australia’s middle class is @#$%ing over the least fortunate in our society by destroying their jobs and simultaneously denying them affordable shelter, all done, in the end analysis, to boost their own fragile ego’s [email protected]#$%ing-lievable

        But as I said, Joe Sixpack is fat dumb and happy, and as Rusty astutely observed his narcissism knows no bounds.

      • CB,

        I guess my point is that happy Joe SP has priced his own kids out of the market, so the next generation of Joe Sixpack won’t be nearly as happy about the whole thing.

    • You neglect to mention that it was 70% of population a couple of years ago, now 66% and falling… and that the actual individuals making up the 70% are virtually the same. Entry is empirically more difficult as time goes on.

      At some point, though, probably after some of the homeowning BBs have departed, the 70% will have turned into 45%, unless there’s a crash in the meantime.

  12. I think many of the commentators here are using straw man arguments.

    Try reading the first line of the quote:

    “The worst aspect of all this [escalating house prices] is that although particular individuals become better off as a result, people overall do not.”

    • “…in Australia, real estate prices do not depend on supply and demand; they depend on the banks willingness to lend toxic sums of debt to new homebuyers”.

      Not sure if he means lending for purchase of investment property by “new homebuyers”, but I think this is central to the problem. The combination of lobbying influenced housing/immigration related policy and loose lending by our banks is like a binary explosive blowing “house prices to the moon” (acknowledgement to reusachtige).

  13. SweeperMEMBER

    Housing is an investment delusion. Bubbles just represent a transfer of wealth from tenants to investors/landllords.

    For owner occupiers it is always a wash (the PV of the future imputed rental cost always equals the PV of the future imputed rental income)

    The sole beneficiaries of bubbles (landlords) are able to perpetuate the bubble by tricking owner occupiers into thinking that they themselves are beneficiaries.