Why work when you can speculate on property?

Cross-posted from The Conversation

Real home prices across Australia have climbed 150% since 2000, while real wages have climbed by less than a third.

Sydney and Melbourne rank among the most expensive cities in the world. Australia-wide, home ownership levels have fallen from 70% to 65% in the last 20 years and home equity levels have fallen from 80% to 75%. Younger workers have been completely priced out of the major cities.

Among those who can afford homes, the increase in household debt to income ratios is weighing on consumption and increasing financial fragility.

We are often told the problem lies in supply — we don’t have enough homes in the places people want them. And while it’s true a reduction in the supply of housing relative to the population will reduce housing per person and increase housing rents, what we are seeing is something different — a growing divergence between rents and the price of housing as a financial asset that’s increasing much more quickly.

Australia has become something of a world leader in demand-driven home price inflation. Australians have been increasingly buying housing for the purpose of securing financial returns — both capital gains and rental income, in a process often described as the financialisation of housing, but one that we think can be more accurately thought of as “rentierization”.

How it happened

In a working paper published this morning by the University of Sydney and the University College London Institute for Innovation and Public Purpose, we argue “rentierization” best describes the increasing use of housing to extract land rents, in the form of capital gains on property and rents from tenants — a process in which Australia is well advanced.

Despite multiple major boom and bust cycles, including Victoria’s 1880s land boom and the 1890s recession that followed, land values and home prices were relatively low compared to the total value of economic activity right up the 1960s.

In contrast, we show, real Australian home prices have soared 215% since 1980 and have shown few signs of reversion to long-term trends, despite brief corrections in 2009-10 and 2017-2019.

The graph shows the rise in home prices has been driven by rising land values rather than construction costs, which have grown at a rate closer to general price inflation.

It’s tempting to ascribe the takeoff in home prices to low interest rates. Low rates enable households to take out larger mortgages relative to their incomes.

But rates were also low in the 1960s (close to rates in the 2010s, when home prices were soaring) and didn’t much push up prices then.

More from the house than the wage

Low rates appear to be a necessary, but not a sufficient, condition for soaring prices. Among the other things that seem to be needed are increased access to finance, declining public involvement in housing, and tax breaks that reflect the political power of owners.

The return to land in the form of capital growth has climbed from around 3.5% of gross domestic product before 1960 to 16.7% of GDP since 2000.

It has become so high as to rival and at times dominate wages as a source of household income.

The graph below compares the annual return to a typical home over a year with the annual return to labour in the form of a wage, both nationally and for Sydney (where only recent data is available).

When the measure is greater than one it implies that the average home had a greater return, made up of rent and capital gains, than the average worker.

In 16 of the 29 quarters leading up to June 2019, the median Sydney home earned more than the median full-time worker earned from wages.

In Australia, housing is overwhelmingly privately owned. For a brief period in the 1950 and 1960s, public housing was created on a significant scale, but a huge privatisation program soon followed and today it represents just a few percent of new supply.

Into this environment was thrown the removal of controls on lending from the 1980s, enabling banks to expand property-related lending.

More credit flowing in to a finite supply of land generates a feedback cycle as rising prices and collateral values stimulates more lending and higher prices.

In Australia, mortgage lending grew from just under 20% of GDP in 1990 to over 80% today. By way of comparison, business lending climbed 35% to 40%.

The vast majority of mortgage lending is for the purchase of existing, rather than new, homes.

Investors push up prices for everyone

The investor share of new mortgage lending has grown from 10% in the early 1990s to 40%. It has given owner occupiers and first home buyers price competition they didn’t previously have to face.

Australia’s unusually generous tax concessions for investors helped. They are granted discounts on capital gains tax, while being able to deduct the full costs of operating their properties, (including interest costs) against income from any source.

Where the deductions exceed rental income, the process is known as negative gearing.

A lot will need to change in order to shift things. Mortgage credit will need stronger regulation. It may be time to revisit the credit controls used in Australia in the 1950s and 1960s, which directed investment into new rather than existing housing and helped increase home ownership.

The case for a central housing bank

Taxes should focus on land rents, in the form of increasing residential property values or windfalls from changing land use. Taxing away future rents would dent speculation.

Broadening annual land value taxes to primary residences as well as investors housing would be part of the change, introduced at a low initial rate and with options for delayed payment or borrowing against future sales for those on low incomes.

Tax advantages extended housing investors, such as negative gearing and discounted capital gains taxes, should be scrapped.

And there’s a case to reintroduce direct government involvement. A central housing bank could use its ability to supply and sell new housing to set a “home price corridor” to ensure home prices did not rise rapidly and dampen potential falls in prices.

It could also be used to provide a variety of alternative stable tenures for households, such as different kinds of renting, public housing and selling dwellings to social housing providers at discounted prices.

Challenging vested interests will be hard, but the current downturn offers hope.

As rates of home ownership fall, renters struggle to make ends meet and central banks run out of leverage to stimulate the economy with interest rates already at rock-bottom, reforms that previously appeared politically impossible might gain traction.

Article by Cameron Murray, Research Fellow – Henry Halloran Trust, University of Sydney and Josh Ryan-Collins, Head of Finance and Macroeconomics, Institute of Innovation and Public Purpose, UCL


  1. Scrapping negative gearing didn’t work out so well for Labor. I cannot see either party running that policy again for at least the next decade and probably longer.

    • MSM would love you to believe that. NG didn’t cost Labor the election.

      Labor have lost the trust of the country.

      Everyone knows a Labor socialist big Australia is even worse than a dog eat dog LNP big Australia.

      • Given scrapping NG on existing properties, along with scrapping dividend imputation for those paying no tax, I’d argue it was. That and cutting the CGT discount in half

        Then their union mates were stupid enough to float the topic of death taxes, and Bill wasn’t smart enough to squash the life from the suggestion.

        • I hadn’t even heard of death taxes, but I did hear of unlimited parental visas. I’d guess 10% of Australians heard of either.

          As MB pointed out, NG accounts for only about 10% of the overvalue. FFfffffffaaaaarrrr more significant is immigration. Labor LOVE immigration as much as LNP do.

          Check this out…. https://www.populationpyramid.net/australia/2020/

          Far more young voters than NGed, franking credits oldies.

          Labor are finished because they are a toxic anti Australia party, even worse than LNP. They will not govern this country again IMO. Almost nothing to do with NG.

          • Given both LibNat and Labor are pro-crush loading and have done everything possible to keep the ponzi scheme running, I don’t see how immigration was an important issue.

          • Immigration was THE ISSUE because immigration hurts the plebs far more than the rest, leaving Labor terminally unelectable.

            In addition, Labor lost control of borders and looked hopelessly incompetent. Australians aren’t going to put up with that. The class of migrant Labor prefers is least favoured among Australia in general. Labor cannot win until they change.

            Australia will continue voting for the best bad option.

      • these elections were really tight. Franking Credits or NG probably costed labour the elections. They should have go for one of those and scrap next after next elections.
        But I am glad Labour did not win this time.

        • Same, watching the Liberals squirm during this pandemic makes me light up. Except for the fact that their incompetence may damage my health

      • “Everyone knows a Labor socialist big Australia is even worse than a dog eat dog LNP big Australia.”

        Everyone knows the corrupt LNP will sell off everything and enrich their donor mates before putting the public interest first.

  2. Another wasted opportunity to identify the true cause of the housing bubble. If only economists understood the monetary system. The real clue lies in the date that prices took off to the moon, but the author/s fluffed it. Oh well …

      • While a contributing factor it doesn’t explain the bulk of it — other Anglophone countries have also enjoyed monster bubbles through the same era

    • Nonsense. There is 1913 federal reserve, there is 1940′ bretton woods, 1970 Nixen and Aussie house prices boomed since 1960 when the shortage of housing land started to become a problem.
      Shortage of land + abundant fiat money and therefore land costs a lot of fiat. Get it?
      It’s not one or the other, it is both.

    • It’s interesting that house price inflation has tracked up continuously from the year the RBA was established.

    • Ventura SpleenMEMBER

      Dominic, there’s a bunch of policy failures, sorry factors. No single magic bullet.

      But I suspect you’re referring here to the disastrous Basel II capital accord, which slashed risk weightings on mortgages to 17% and allowed the major banks (IRB approach) to concoct their own capital fantasies?

      End result, a massive shift from business lending to residential and commercial property lending … transforming the world’s commercial banks from engines of the economy into giant, bloated, systemically risky building societies. Why lend to businesses when it’s more risky and you have to set aside more capital?

      Australia, as usual, watched the GFC and learned nothing (other than congratulating ourselves that we clearly had the world’s best financial regulators).

      The irony is that APRA’s 15-year failure as an agency meant the risk landscape eventually flipped like a cheap reno. Now resi mortgages are super risky, yet still rated low risk in the banks’ internal models.

      The entire Australian political system is now built upon one core objective: staving off GFC 2.0 …

      • Not really, mate. The single biggest issue was tossing the gold standard into the long grass — it allowed for the unfettered expansion of unbacked credit. And then in 1996 JP Morgan convinced the SEC to accept VAR (value at risk) as a template for banks to determine how much capital they needed to allocate to their loan and derivatives books. 1996 was the year. Check out what credit expansion and property prices do from there.

  3. Around 2000 in Victoria, the government stopped paying for the infrastructure for greenfield housing developments. The costs for roads, drainage etc were pushed onto developers who then pushed the costs onto buyers. Sent the price of an empty block up by 100K overnight and by even more ever since.

  4. Ronin8317MEMBER

    The bank won’t lend you the money to speculate on property unless you have a job. Remove this restriction and there will be no need for anyone to work : we can all get rich selling property to each another.

    • Jumping jack flash


      Only a matter of time.

      Once the banks become completely confident in their own system they spent years carefully creating, they will see that as long as they push enough debt into the economy through house prices there is no risk:

      Debt goes in, house prices rise, LVR improves, capital gains grow allowing equity to be extracted for creating additional mortgages, and around she goes.

      When it is time to sell or downsize, the bank simply gives out enough debt to someone else to cover off any remaining debt owing, plus the interest, plus a bit of extra on top as the capital gains. No risk at any point. No need for income. Just debt and houses.

      This is the “debt engine” which really took off around 2006 and oh boy that was a great time for everyone indeed, but since then they’ve had a really hard time trying to get it going again despite their best efforts. They’ll crack the code eventually I’m sure.

      • Strange EconomicsMEMBER

        Yes, most people you meet make 10 years salary profit from house speculation, or inheiit 10 years from their parents house.

        Who wants to kill a golden goose?

        They give mortgages to Jobkeeper people currently. Why not Jobseekers too. Or like the US NINJA loans coming soon. Just after you are allowed to use all your super in houses too.

  5. Jumping jack flash

    Living off the capital gains and any other income from houses is the Australian dream.

    Have a go, get a go. Mate.

  6. Cameron was arguing earlier that prices are justified and should actually increase in the near term. The above seems to reinforce that view (not that he agrees with the outcome) that significant policy changes need to occur before we see any wholesale downside movement.

    Lack of policy in 3…2…1

    I do feel that the authors have not fully captured the impact of a global pandemic casing mass unemployment and the cyclical default risk on SME’s, consumers and banks. Investors have pushed the prices up but their activity is at an all time low, credit conditions are tightening and while negative gearing losses will be increasing that generally only of benefit if you expect a capital gain sometime in the future and have the immediate incomes to write the losses off against.

    For me, many people forgot how many Australian’s own their home outright, its a really large %. If the family home remains the priority they remain completely content regardless of property prices. Its only the highly leveraged which risk a flame out at 45,000 feet.

  7. I’ve read that article a couple of times now and for the life of me I can’t find any reference to immigration.

    • I was looking for the same thing. After reading this article, you would think that house prices have only risen because of the removal of lending controls and tax breaks.

      • You cannot expect AUSTRAC or FIRB to actually publish the amount of illegal money in this country do you? They only have one stamp, its says “approved”.

        • FIRB only has one full time employee and a few otherwise busy part- timers (as well as being ‘open boarder’ enthusiasts)

  8. Great work but I think we need to address the concept of national savings before it is possible to bury the housing wealth fairy.
    In most socialist systems the concept of national savings is directly related to national capability. (what can we do to support ourselves and through this work earn money to buy that which we don’t produce). In this sense a nation saves by up-skilling and increasing its unit production capacity or differentiated product market penetration.
    If these measures of “savings” were applied to Australia then one would conclude that we have suffered at least 30 years of wealth loss (through deindustrialization) but of course this is not how wealth is measured in Australia so we all sit around counting how many absurdly overpriced blocks of Sydney/ Melb RE we own.

    • But we are rich! Just look at how many nail salons and rub ‘n; tug joints we have per person!

      • Silly me I forgot to count rub’n’tugs as Assets, I knew they weren’t exactly Liabilities so I foolishly put them in the Consumables column. My logic for this being that nobody pays anything for a 40 year old rub’n’tug “specialist”the value of this asset depreciates rapidly the first day after the packaging is opened.

  9. Houses are shelter and that is a basic need. Increasing the price of a basic need is not desirable for any society. If you turn a basic need like shelter into into a speculative investment vehicle you will have this undesirable outcome. Why would anyone think it is a good to divert investment money away from productive areas of the economy into housing speculation is beyond stupid.

    • We really need to teach the general public, including those who own a house, that high houses prices isn’t actually a good thing.

      If the house you live in goes up in value, what does that actually mean? There’s a little ego boost, but in real terms, what does it mean? It means if you sell big you then need to buy big. Unless you’re downsizing and moving away from your kids and grandkids, it is pointless. Even if you use your own home as an ATM for cash advances, it’s an expensive way to finance your lifestyle and it’s at the cost of affordability for your kids and their children, plus for society as a whole. And for the investing class, rising house prices comes with decreasing amenity through rising population (through immigration).

      But I suppose real estate, for the common person, is an easy to understand pursuit, like watching a ball go into a goal.

    • If you turn a basic need like shelter into into a speculative investment vehicle you will have this undesirable outcome.

      No. Govt policy creates a shortage of housing. That is a prerequisite for this outcome.
      Paper clips are already a speculative investment vehicle – the trouble is there is no shortage of them – hence price does not rise.

  10. Simple solution:
    Every adult can have one registered residence home at, let’s say, 0.1% property tax p.a.
    2nd home (e.g. vacation home) would be 1.8% p.a. property tax and starting from the 3rd residential property 3.6% property tax p.a.
    This would make large pooling of houses and properties uncompetitive and would give young people a chance for a decent life.

    • There is a lot of merit in that tax plan. Also it would help if enough decent houses were built to house our population and any immigrants we allow in.

  11. Has Cameron Murray done research on the distortion effects of multi-generational migrants buying in Australia?

    That is, the Indian or Chinese migrant family, with the migrant adult children (and their offspring) with both sets of in-laws pooling their money together? Where the elderly parents don’t even need to be citizens or permanent residents, just staying on ever renewed ‘visiting’ visas.

  12. Its all just about leverage and specifically your loan (or debt) to income ratio.
    Since the 80’s the LTI’s (or DTI) have increased until some mortgages hit around 9x in 2017.
    A very modest scale back to about 7-8x LTI showed just how quick and touchy house prices are to a simple scale back in new LTI’s. Everyone thought these ratios were ok as repayments were low do to falling rates. Chris Joye often argues this when looking at housing affordability. However when you max out your LTI and your loan length and you have bottomed the rates, there is absolutely no buffer left. No wonder people had to go on mortgage relief and the delinquencies are rising.
    Banks are going to have to do 2 things, either increase the DTI’s back up to 9x or increase the loan lengths past 30 years (probably 35 years will be the new norm) to increase house prices.