PProperty is Australia’s default religion. At the start of 2022, the total value of residential real estate was about $9.8 billion, or two-thirds of total household wealth of $14.7 billion. This wealth is increasingly problematic.
In Australia, housing is no longer just a shelter but an investment and a reserve of savings. Like a magic pudding, home equity (current value less any mortgages) should fund consumption, secure retirement, and be passed on to your offspring.
The attractiveness of the property is understandable. It provides secure housing, converts rent into a form of savings, and rising values have historically protected purchasing power. It creates well-paying, hard-to-relocate local construction jobs. Policymakers can influence activity through zoning laws, land release, homeownership incentives, interest rates, and loan availability. He is popular with voters.
But the resulting overinvestment creates several problems.
1. It immobilizes household savings
Household savings are concentrated in a single illiquid asset. The volatility of real estate prices presents risks, especially since purchases generally involve significant borrowing. The exceptional price increases reflect the confluence of strong population growth, land shortages around major cities, generous tax regimes, incentives, favorable regulatory treatment of mortgages, ultra-low interest rates and abundant credit. These past performances are not indicative of future values.
2. It ties up capital
In the economy as a whole, it ties up a large amount of capital, which does not generate ongoing income, as business investments would. High property prices limit wage flexibility and contribute to Australia’s uncompetitive cost structures. It hampers labor mobility. Households cannot move where they cannot find suitable affordable housing or exchange their existing homes on acceptable terms.
3. Governments become dependent on property income
Governments are becoming dependent on property revenues. Property taxes probably represent more than 30% of state government revenue. Local municipalities depend almost exclusively on this source of revenue.
4. It creates high household debt
At 130% of GDP, Australian household debt is among the highest in the world. Household borrowing to disposable income averages more than 200%, four times that of the 1980s. Australia’s banking system is heavily exposed to house prices, with residential mortgages making up over 60% of total lending one of the highest levels in the world and more than double in the US and UK.
5. It Limits Politics
Maintaining real estate prices and ensuring the ability to meet mortgage repayments disproportionately influence the setting of interest rates to the detriment of managing inflation or adequately remunerating savers. Indeed, despite historically low interest rates, debt service represents around 13% of income, which is higher than levels three decades ago, when interest rates were close to 20%. Immigration and environmental policies must take into account the impact on housing. High prices may lead to financial instability. History shows that it is difficult to manage out of control real estate markets without serious economic crisis or financial crisis.
6. It masks weak wage growth
High home values hide stagnant wages and a moribund standard of living. Unaffordable housing exaggerates inequalities, which are perpetuated from one generation to the next.
7. Wealth can be illusory
High prices mean many homebuyers will never pay off their mortgages, but instead pay monthly fees in perpetuity – a “housing as a service” model.
Even homeowners who bought their homes in older, luckier times may find that their earnings are modest. A quadrupling of house prices over 20 years is equivalent to 7% per year, before annual occupancy and interest charges.
Owners find themselves asset-rich but income-poor. Residences do not provide cash and instead require expenses for rates, utilities, insurance, and maintenance. Accessing paper wealth for living expenses requires borrowing against home equity or downsizing to free up cash. But the sale may bring in less money than expected because the price of the replacement home will have increased. The exchange requires available creditworthy buyers and willing lenders. If a large portion of baby boomers simultaneously try to scale down, house prices will adjust, reducing the cash freed up. Transaction fees of 3% to 5%, such as agent fees, stamp duty and title transfer, also reduce winnings.
The main political parties have sought to increase access to housing. While welcome, their policies only help a limited number of individuals. The extra demand further increases prices and competition for properties, negating the benefits. They fail to address the fundamental issues and ignore the function of homeownership in our society and economy.
While integral to the Australian dream, home ownership has created shoddy, lopsided growth and deceptive prosperity while contributing to the nation’s structural problems and rigidity. Australia’s dependence on property is now deeply entrenched and likely irreversible. As Winston Churchill observed: “We shape our buildings; then they shape us.
A serious debate is difficult. The two-thirds of Australians who own homes, either directly or with a mortgage, will not accept measures, no matter how well-crafted, that could threaten the value of their main asset and wealth.