Housing Boom or Blame Boom?

There’s talk again of the house price boom (or even bubble). I know people who are looking to buy at the moment, and I feel so lucky that I’m not having to find a first home in the current market.

However, stories I read in the media suggest to me that we’re also in the midst of a blame game, where various bogeymen are out there pushing up prices to the detriment of everyone else. If you believe everything you read, we can blame:

  • First-home buyers – whose free cash from the government in the form of the FHOG (First Home Owners Grant) is making it hard for others to compete.
  • Overseas investors – who are apparently making the most of relaxed rules from the FIRB (Foreign Investment Review Board) to invest in Australia when other international markets are looking shaky and depressed.
  • Local investors (in particular Baby Boomers and Gen X) – whose access to the tax deduction of negative gearing enables them to sustain larger holding costs of property than non-investors.
  • Developers – who have been slowly releasing lots from their land banks rather than supplying enough to the market to meet the demand
  • Immigrants – who have been coming here in increasing numbers because it has a promising way of life but are now competing with the locals for somewhere to stay.
  • Governments – for allowing all of the above to occur.

Is there anyone left?

What is good in this debate is the recognition that it is supply and demand that is driving the prices in the market. However, the purpose of this finger-pointing seems to be to blame everybody else for the problem. I’m not convinced that any of the above factors are at the heart of the matter:

  • First-home buyers – the demand from these guys doesn’t explain why an unrenovated house in Richmond sells for more than $2m (as I read in yesterday’s paper). The whole market is booming, not just the cheaper end.
  • Overseas investors – although they are active, they are still a minority. I don’t think they could underpin the entire boom.
  • Local investors – negative gearing also results in lower rents than would otherwise occur, which should in turn reduce the demand for home ownership.
  • Developers – their land is generally at the fringe, and there is heavy demand in the centre.
  • Immigrants – these are a net benefit to a society, since they generate taxes and jobs, but have always been an easy target.
  • Governments – there is some truth to the saying that in a democracy, we get the government that we deserve. If governments continue to follow policies that we don’t agree with, we can only blame ourselves for voting them in.

On the other hand, a factor that I don’t think has gotten enough attention is our culture. In particular, the “Australia dream” of owning a house on a block of land.

I worry that it is the pursuit of this goal, more than any single segment of society, that is driving the demand for houses in the suburbs of our capital cities. We need to give up on this dream if we are to achieve sufficient densities in the inner ring of suburbs where most people wish to live.

Rather than blaming other people, I can fess-up to being as guilty as everybody else on this one. A couple of years back, Kate and I bought a house together that would’ve housed a family of five when it was designed and built around 1900 in Kensington. This is a typical, gentrified, ex-working-class neighborhood of Melbourne that probably has lower densities now than when it was new. We moved out after we had our first child, because it was too small for us (!).

In the same way that governments around the world have influenced the cultural desires for a certain family size, it ought to be possible to embark on a campaign to change our cultural expectations and change this demand factor. Make living in high-density accommodation the trendy option. Guilt people out of their large houses with empty rooms and private back yards. (Other countries have a higher density of living than us, hence why many immigrants are willing to live in apartment blocks that locals would avoid; another reason why immigrants aren’t contributing as much to the problem.)

At the same time, there needs to be more direct incentive to motivate people to embark on such a change. Make subdivision easier. Make building apartments on new land easier. Ensure that apartment blocks are built well (good climate control and sound/smell proofing) and there is provision for common outdoor areas.

I’ve spent most of my years since I left home living in higher density accommodation such as apartments and townhouses. Although I’m currently living in a house, I think I’d be willing to share walls again.

7 thoughts on “Housing Boom or Blame Boom?”

  1. I think you’re onto something here. Lower density living may have some social benefits, but there are downsides as well – one of which is demand. Personally I’d happily share walls too but I married someone who can’t bear the thought so it’s not likely to happen any time soon.

  2. Good points. One of the main underlying problems is that the media (and, dare I say the public) is generally not good at handling issues that are complex, i.e. that have more than one variable or “guilty party”.

    I am also convinced that none of the reasons stated is enough to drive the prices up to bubble-levels in and of itself, but I would also be willing to bet that many of those reasons _do_ play a more modest role in the equation.

    A few comments;

    1) It could be argued that the rents _are_ low, though it certainly may not feel like that to most people including myself. According to the EIU Australia’s property market is 50% (!) overvalued based on rental yields – so naturally that could be interpreted the other way by saying rents are too low if we assume the property is fairly priced.

    2) Markets are far from rational and the housing market may be one of the least rational parts of it, driven even more by sentiment (including culture) than other parts; hence while there may be a bubble, it may not burst for years and years to come.

    3) I would personally have no problem sharing walls; one of the biggest problems with that is indeed sound insulation, which is relatively cheap (excellent sound insulation adds ~5% of the building costs) considering the benefits. Unfortunately the apartment buildings I have seen here have been made of the same cardboard as the houses ;)

    The problem with blaming culture is that to many people it’s off limits and to change it radically means work done over generations – or under duress. And a government who takes on the task of changing whatever the traditional “dream” of a nation has been is likely to get hammered at the next election – and, unfortunately, too much policy is dictated by the party’s viability (or lack thereof) at the next election.

    In that respect I think democracies often end up with even worse governments than they deserve.

  3. @Spilt Milk,

    It does seem that today there are very few who actively choose to live in apartments over houses. There are mostly those that can stand it, and those that can’t.

    @sim,

    I like the quote from Churchill – “democracy is the worst form of Government except for all those other forms that have been tried”.

  4. I totally agree with the density issue, and not just for the housing market. It has so many knock-on effects in terms of energy and environment as well.

    But we all know that agreement doesn’t make very good internet fodder, so let me instead concentrate on my disagreement :)

    The investor factor is very real, I believe, and your dismissal in terms of lowering rent not quite convincing. Renting has very significant disadvantages compared to owning — notably the inability to renovate to accomodate family changes or personal taste, but also the long-term insecurity of potential eviction for rebuilding, etc, which was a pressing issue in BC while I was there. I suspect renters have to move homes more often than buyers, though I’d like to see some data on that.

    I have never really understood why investment should be more tax-incentivized than owning. I’m thinking here of my brother, whose friends fall into two categories: his engineer workmates who each own several investment homes, and his music/juggling friends whose lower paying jobs prevent them from having the opportunity to have their own house. Income inequality is fair enough, but I can’t see why it should be exarcerbated by the tax system.

  5. @Bob,

    (With the proviso that this relates only to the Australian situation…)

    I’m not sure that investing (as such) has any special tax “incentives” attached to it. If anything, owners have preferential tax treatment. Let me explain..

    Investing is just one case of business operations. Investors are taxed just like any other business. Losses in one area are offset against profits in another and the tax entity (a company or an individual) pays tax on the overall profit/loss. Negative gearing is just where the loss in the property area is offset against the income in the salary area. On the other hand, if the investment makes a profit, it gets taxed like any other business. Basically the same capital gains tax and income tax rules apply (although business has a flat tax rate and individuals have a sliding scale).

    However, property that is owner-occupied (the “principal place of residence”) is treated differently. When you sell such property, you don’t have to pay any tax at all on the gain (over what you paid when you bought). Given that these gains can be quite substantial, e.g. when downsizing, this is a pretty generous concession to owners.

    The issue of renting is more complex. There are clearly both pros and cons. I have chosen renting over buying at several points in my life, and buying over renting at others. For those people who aren’t in a position to be able to choose, are they being unfairly penalised? The current system is reasonably flexible, but the flexibility isn’t being used.

    For example, most landlords are really keen to have tenants who will stay on for long periods of time, as this minimises vacancy periods and advertising costs. The current system supports people taking on multi-year leases, and if this was desired by a lot of tenants (e.g. to remove the risk of eviction), you would expect market forces would result in multi-year leases becoming common. However, I don’t hear of this happening. So, I assume that it’s because tenants don’t want it. It would be good to have more data on this.

  6. Hm, I guess I’m at little bit over my head here. Let me ask some questions to get things straight.

    Firstly, I see that property investment is taxed no differently from other forms of investment. So I was wrong to bring up tax as a direct influence.

    My impression, though, mainly based upon the way I see people behaving, is that in the last decade or so, property investment has become increasingly attractive relative to other forms (eg stocks). Question: Is that impression accurate? More directly, is the proportion of the property market owned by investors increasing?

    Next question: If so, why?

    If not then there’s genuinely no reason to connect investors and the housing bubble at all.

    As for the “pros and cons” of renting, what are the “pros” you are thinking of?

    I can only think of one significant one: flexibility. A renter can change residences with (relatively) little financial penalty, which is excellent for people with transient lifestyles, such as myself.

    However, at the ripe old age of 35, I am an extreme outlier in this category. In the position of almost all of my friends — steady job, children nearing school age — there is plenty enough flexibility in ownership. And for older generations, we can add the additional fact that owning property also doubles as an insurance policy, in case of retirement or income loss. Thus, I suspect we’re only talking about 10-20% of the housing market, tops, for which flexibility is a real advantage.

    You can’t even claim low cost as an advantage of renting, since in the long term renting is far more expensive. (I understand that in certain circumstances, such as a housing bubble, renting can be financially preferable over the medium term, say 5 years or so, but even then it fails in the long run.)

    The only financial advantage is lower capital outlay. That is to say, renting is good for poorer people because they can’t afford to buy.

    What concerns me is that low-income earners are being forced into an option that is both inferior and more expensive. Since housing is not an optional expenditure, this does worry me somewhat.

    Incidentally, I am not trying to ascribe blame to investors here. If it is financially advantageous to invest in property, then you can hardly blame people for doing so. My question is merely whether the issue of the previous paragraph carries enough moral weight to justify some kind of change at the legislative level. Opinion?

  7. @Bob,

    You ask interesting questions..

    Firstly, according to ABS census information, the proportion of homes that are owner occupied has remained pretty steady over the last few decades.
    http://www.abs.gov.au/AUSSTATS/abs@.nsf/bb8db737e2af84b8ca2571780015701e/37171EAC4F4F016ECA2573D20010F849?opendocument
    (Although, there is the possibility of a shift in the last three years that hasn’t yet been captured in a census.)

    I agree that there are serious disadvantages in renting, but the advantages as I see them are:
    * Monthly outlays are cheaper (you can usually afford to rent a better house than you can afford to buy)
    * Initial outlays are cheaper (pay a month’s bond versus 10% deposit, stamp duty, legal costs, mortgage costs, etc.)
    * Faster to get into (can find a house an move in within days versus typical minimum 30 days settlement once contracts are negotiated)
    * Faster to get out of (on top of the delays a purchaser faces, the seller also needs to arrange a real estate agent, conduct a multi-week sales/auction campaign, and possibly fix up a couple of things prior to putting the place on the market in order to maximise appeal)
    * Someone else is responsible for fixing stuff (this can also be a negative, but if the landlord/agent comply with their legal obligations then it can be convenient, e.g. our toilet has needed fixing for the last six months but we haven’t been able to arrange it, while a landlord would’ve been obligated to fix it in days for us at no additional cost)
    * Simpler/clearer legal relationship between housemates (in a share house, it can be better to rent from a “third” party rather than purchase a house together)
    * Location (there are probably some desirable locations where it’s not possible to purchase but it is possible to rent, e.g. on a university campus)

    I understand that some “rich” people choose to rent, and invest in the stockmarket the difference between their rental payments and what they would’ve had to pay on a mortgage. They claim to be ahead, but I don’t think the numbers work. A variant on this is investing in a property while renting another.

    While I can see that the broader situation here is another example of the rich getting richer and the poor getting poorer, I think that problem is too big for me to solve.

    I have struggled to think of what to write at this point. No clear thoughts occur to me, which suggests I’ll need to do a bit of research before I can come up with something constructive.

    However, I did want to qualify your comment about “in the long term renting is far more expensive”. Based on my own calculations, in general owners are ahead of renters only when they sell their home and they aren’t going to use those funds to immediately buy a bigger/more expensive home. This typically occurs once in the life of the owner, when they have retired and are downsizing. So, we are talking really long term here. All the years up until then, the renters are ahead.

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