The author addresses cause and possible solutions in their longer essay.
The fundamental cause is taxation policy changes around 2000.
The solution is further policy changes, but the wicked problem is that the democratic majority do not want these changes; or can be easily persuaded these changes are likely harmful for them.
So Australia socially and economically exists in a death spiral; where wealth channeled into real estate is not consistent with its productive utility.
I agree the cause can be made to go away overnight. However the impact of doing the wrong thing could be disastrous.
In Australia we have a housing bubble, but the problem is woven very deep. Our tax system favours property investments. Our top tax rate (45%) kicks in at extremely low levels of income compared to globally ($180,000 AUD which is around $135,000 USD). The system provides all kinds of tax deductions to investment property owners, and ways of making paper losses to offset income tax.
Much of our economic activity is banking, retail and construction. Much of which is fuelled by the churn in property with ever increasing prices. This economic cycle kept Australia out of recession until Covid hit. Now that the average house is over $500,000 AUD, we have large swaths of the younger population leveraged to their eyeballs in debt at a 2% interest rate. If housing prices fall or interest rates rise there will be a collapse, and a good chance of an extended recession we have avoided.
The best case is they slowly the market down, we have a moderate rate of inflation which allows the real value of houses to drop. At the same time reduce the tax benefits to property investment.
Unfortunately this won't happen. The political class knows that the median voter is a home owner, and its in their interests for housing prices to keep rising. They are just hoping that it can keep going until after they are finished. Totally not jaded about not being able to afford a house in my late 30s due to being wiped out in the 2008 GFC and then starting a family.
It would help, but addressing only one side of the supply and demand equation won’t solve the problem. Property investment is still very lucrative relative to productive enterprises, so people will continue to funnel money into it instead of businesses until taxes capital gains or land taxes increase to a sufficient degree.
Further, Australia is operating an EXTREMELY aggressive population expansion policy. This can and should be reduced significantly.
The solution is some mix of your suggestion and mine. Unfortunately most Australians own or live in an owned property. They won’t vote for this. In a few decades they will be in the minority, and life-long renters will be in charge. When that happens we can expect some wild policy swings. Similar patterns are developing all over the Western world.
There are plenty of Australians who shout about the property bubble. The problem is that there is so much middle-class wealth tied up in it, that any political party that steps forward and eliminates negative gearing is basically signing their own death warrant - they won't be a player for 10-15 years.
To make the technical (and somewhat cold-hearted) argument: because it will correct a massive mis-allocation of capital in the Australian economy. This mis-allocated capital is being poured into existing residential real estate (80% of property investment is in already existing properties). It's capital that could otherwise be put to some productive purpose, like business loans for example.
The above is basically a stylised description of what has actually been happening in Australia over the past two decades: real estate loans have been crowding out business loans: http://i.imgur.com/g7a9QDL.png . The upper bound for sophisticated public discussion on economic policy is, IMHO, when pollies yammer on about 'productivity' (a depressingly low 'upper bound', and not without its own issues). If we are truly serious about lifting multi-factor productivity, then we should not be distorting capital investment decisions with crazy-expensive tax breaks for property investors.
It would be great if we could correct this problem, without serious macroeconomic upheaval, by gradually phasing in tax reforms. But that opportunity passed us by about a decade ago. The reforms still have to occur, mind you. It's just that now we pretty much have to eat a massive property bust (and possible crisis in the financial sector) first.
As for the reforms, my top 3 would be:
- Change capital gains back to indexation by inflation (rather than a flat 50% discount after 1 year of ownership).
- Get the States to slowly repeal stamp duty on property and insurance, and slowly introduce a tax on the unimproved value of land (say, over a 5 year timeframe).
- Simplify and repeal a whole bunch of zoning and land planning laws and regulations, at both the State and local council level.
Real estate prices are a huge problem in Sydney and the state government is quite cozy with construction companies and developers. There are way too many fingers in the pie for any change to occur. We also have tax breaks for property investors (believe it or not) and as a result, far too many ageing voters with an extra property or two in the hope of funding their retirement, so abolishing negative gearing is a political football as well.
Australia is afflicted by this insanity as well. We have Trillions tied up in housing. Yet productivity and economic complexity are on the decline because everyone is trying to flip houses and make housing into an investment vehicle rather that invest in new businesses.
The middle classes in Australia have a lot of expendable income and not much to do with it. So "safe" investment properties have become very popular. This has resulted in a lot of peoples investments being tied up in real estate. This makes any serious reform politically impossible for the foreseeable future. and people who don't have investment investment properties don't want the value of their home to decrease.
The current Labor government lost a previous election in part due to proposed changes regarding the taxation of investment properties. It dumped[0] those policies and won the last election.
Property has become a cringy weird national obsession to the point where high-school children [1] and are thinking about it.
There was a campaign in Australia to remove the income tax deduction on investment properties as it was cited as the cause of high property prices
What most people ignored is that it would spike rents and cause more short-term harm, especially as lending tightened
Everybody was casting for something to blame and ignored the most obvious solution staring them in the face - an increase of property supply (as you've said)
I'd agree with this. In Australia, it is too financially attractive to own investment property and enough of the population makes it a political gamble (at the bare minimum) to change that.
The problem is caused by a whole number of factors that incentivise people to buy houses they won’t live in.
Housing in Sydney is becoming a self fulfilling prophecy. The more people spend on it the more it’s value increases hence attracting more investors who drive prices up.
In order for this to stop the majority of the public will need to find this whole situation unacceptable.
I find it absurd that citizens from countries that disallow Australians to buy property can buy residential property here in Sydney. Apparently helping foreign citizens to avoid taxation/capital controls while propping up the construction/banking sector is more important than looking after the average citizens best interests.
Immigration is exacerbating Australian housing problems.
Australia also has an obsession with property speculation as a tax efficient investment with capital gains discounts and negative gearing.
Property in Australia isn’t about owning a home, it’s about having an investment.
Pretty much all houses in Australia are sold at auction. It’s impossible to get an accurate guide price. Every dark pattern is used to maximise sale price at auction. The auctions them selves are something of a spectacle with real estate agents acting as minor celebrities.
So much wealth in Australia is now in property, anything that reduces property value such as building more homes, increasing supply, abolishing negative gearing and capital gains discounts is political suicide. Prosperity owners in Australia have become dependent on the next owner paying more than the current owner to cover negative gearing and make a profit via capital gains. Text book definition of a pyramid scheme.
Builders are land banking drip feeding supply. Why increase supply selling for less when they can maximise value by artificially limit supply.
Then current own homers are a bunch of middle class NIMBYS. I live in a suburb the NSW government announced has a high priority suburb to build high density as it is along a rail route. Perfect place to build along a rail route with access to the city, central coast etc. The locals don’t want it.
Sydney is now the second most expensive place to live in the world. It’s property problems has a lot more to it than immigration.
The problem is housing in Australia has been turned into an investment. The Howard government in the 90's gave houses only 50% capital gains tax, which puts it inline with stocks. This has led to rampant speculation in the property market and the idea the price can only ever go up.
Unfortunately, most of the more politically organised or influential people like things that make property work as an investment. This means they fire up and defeat measures against it. I can't see a way out in Australia.
I've noticed this with my parents — for decades they reacted negatively to any changes the regulations around Australia's housing market, since that was and remains the principal personal wealth creation mechanism in Australia...
Until they reached retirement age. Then the painful realisation that, without plentiful housing, rental prices would consume most of their government pension. Now they're one expense away from financial ruin.
I would say a property price drop would be a good thing because it would feed into lower rents for everything. But that, of course, would have damaging wealth effects for people who lose everything when their mortgage went underwater, and the banks would take massive losses on their oversized residential mortgage portfolios.
More economic growth might reignite property and job markets.
I was talking to a friend of mine in Sydney who earns 200k plus. He was struggling with the idea of buying an average townhouse in an average Sydney suburb because his mortgage + expenses would run over $3k per month. It's madness.
Are we to just stagnate our way out of it? Hold property prices and rents level for 10 years while incomes eke upwards? Or is Australia destined to be in the Norway/Switzerland/Sweden club forever more, and the cheap-as-chips country of my youth is gone forever?
I just can't get away from the uncomfortable feeling that whatever adjustment comes along will be painful.
I’m an Aussie who’s lived in the US for 10+ years - you are spot on. Every time I go back all everyone can talk about is property investment and house prices and buying rentals. It was starting when I left 15 years ago but has reached fever pitch now. Play a little game with yourself - see if you can get through any group social event without the subject of property coming up.
It’s very sad. Australia used to have a somewhat egalitarian mindset, but this is creating such a massive generational wealth and class divide that gets wider and wider every year. No one seems to understand the damage their quest for parasitic income is doing to society.
In Australia, the property market has been artificially inflated for years with favorable tax incentives that encourage investors to hoard properties and sit on them, while writing off any losses as tax deductions.
Meanwhile, renters are being squeezed because landlords are trying to pass on the cost of rising interest rates to their tenants, who are forced to choose between groceries and making rent.
And yet, I would bet my kidney that when interest rates fall we won't see landlords pass on the savings to their tenants.
As the OP's point, the landlord renter system HAS "divided our society into haves and have nots", and it causing serious bitterness in division in our country. And the issue is politically intractable, because the propertied class are not going to accept any reform that lowers the value of their house.
In Australia we have negative gearing. In layman's terms it means you can offset property expenses against your real income.
So if you have a big income with a corresponding big tax burden, you can reduce you extra income to purchase a property and by using the expenses of that investment, reduce you net income and hence reduce you net tax burden.
So rather than paying the tax man, you end up paying the bank, which for you the rich investor, is not bad since the value there is a chance that second, third, forth property that you are now gearing will appreciate in value.
So while the tax receipts of the country go down, your paper wealth goes up, that is until the next GFC.
So the end result is the rich continue to reduce their tax burden, reducing the tax income of the country, hence passing the tax burden onto the middle and lower classes and in the process the rising house prices encourage those same rich to invest in yet another property as their paper wealth continues to climb.
Any one can see that is not good for the country, not good for the community and also not sustainable.
It's easy to create a bubble but at some time the buble has to burst.
The fundamental cause is taxation policy changes around 2000.
The solution is further policy changes, but the wicked problem is that the democratic majority do not want these changes; or can be easily persuaded these changes are likely harmful for them.
So Australia socially and economically exists in a death spiral; where wealth channeled into real estate is not consistent with its productive utility.
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