The short-sighted profiteers in the real estate industry would present this as “good” news

Adam Schwab in yesterday’s Crikey email notes the continuing housing affordability crisis that our governments are utterly failing to tackle:

Another year, another massive increase in house prices and more excuses proffered by the real estate industry as to why Australia’s houses are among the most expensive in the world. A survey by the Canadian Bank of Nova Scotia revealed that even after adjusting for inflation, house prices rose in Australia by 9.4 percent in 2010 — more than any other country surveyed…

Over the past year real incomes have risen by around 4 percent — that means, even after more than a decade of housing boom, prices are still clearly outstripping income growth. That means Australians continue to devote more of their wealth to housing, as opposed to other income producing assets. That is a lot of misallocated capital. And eventually, that misallocation of capital will lead to an inevitable drop in living standards.

But if the “I’m alright thanks Jack” people who bought their houses long before the boom aren’t becoming increasingly bothered that their sons and daughters are staying with them into their thirties, what will finally prompt the big party politicians to seriously tackle the problem?

ELSEWHERE: Citigroup boasts to investors about the growing disparity between rich and poor (via Crikey):

Citigroup has a rather different take on all of this. It notes that the rich have been getting richer and they want to help them to get yet richer! It thus says with respect to good investments: “we like companies that sell to or service the rich — luxury goods, private banks etc.”

It notes that “the rich are the dominant source of income, wealth and demand in … the UK, US, Canada and Australia, countries that have an economically liberal approach to wealth creation”. It suggests “the rich are going to keep getting richer in coming years, as capitalists (the rich) get an even bigger share of GDP as a result, principally, of globalisation”. Fortunately “the global pool of labor in developing countries [will] keep wage inflation in check”.

It asks “what could go wrong?” Well, “the rising wealth gap between rich and poor will probably at some point lead to a political backlash … At some point it is likely that labor will fight back against the rising profit share of the rich …”

But, happily, it “doesn’t see this happening yet, though there are signs of rising political tensions”.

Oh, I think they can probably keep those contained, don’t you?

UPDATE (19/1): The Age continues its policy of blaming the high prices on whatever the real estate industry would like to blame, rather than ever considering that the real estate industry clearly benefits from prices being high!

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13 responses to “The short-sighted profiteers in the real estate industry would present this as “good” news

  1. “And eventually, that misallocation of capital will lead to an inevitable drop in living standards.”

    Good to see you embracing Austrian economic reasoning, Jeremy. We’ll make an economic rationalist out of you yet!

  2. narcoticmusing

    Nothing will ever change on this front. Government’s have learned to simply appear to be doing things to help (even if it actually aggrovates affordability or does nothing at all) because to actually change things, in either direction, would be political suicide. No win situation for Govt.

  3. If Australian house prices are doing well relative to other nations, it may also be a factor of ours being one of the only major economies still in good nick. Not to say that we don’t pay some ridiculous prices for some properties; we do. But any cure may be worse than the disease.

    As events in the US have shown, blowing up housing values does nothing good for the economy. Attempts to depersonalise and villainise those “I’m alright jack” individuals and families who have made rational investment choices in the property market ignores this reality. What’s the alternative? People should “voluntarily” reduce their assets to make you happy? You have this Rich Uncle Moneybags impression of middle-class investors: not all of them wear a bow tie and play court-paume at Royal Melbourne Tennis Club.

    In any case, intelligent property investment means that you’ve got apartments for the kids to move into at uni and beyond – you can charge them a rent ranging from fair to peppercorn and, assuming they don’t grow up to hate everything you stand for, rely on the places being reasonably well looked-after.

  4. jordanrastrick

    Jarrah! You’re alive! Nice to know.

  5. Jordan, I’m resting my blog, but remaining active on Catallaxy and Quiggin. Come and join us if you like.

  6. Government’s have learned to simply appear to be doing things to help

    I see this on a daily basis. It’s a given; so entrenched that no-one bat’s an eyelid when it occurs.

  7. “But any cure may be worse than the disease.”

    Especially if it involves blasphemy against The Market, eh Shabby?

    “In any case, intelligent property investment means that you’ve got apartments for the kids to move into at uni and beyond …”

    Out of touch at all?

  8. As someone who three years ago mortgaged himself to the hilt to buy a house in Sydney, and who has recently re-mortgaged the same property following a relationship break-up, I sincerely hope the market remains inflated, and continues to inflate.

    If it doesn’t then I’ll be extremely disappointed.

  9. “In any case, intelligent property investment means that you’ve got apartments for the kids to move into at uni and beyond “

    Which ignores anyone whos parents don’t currently own an investment property, anyone who doesn’t already own a house and isn’t only now being born (That’s at least two and a half generations you’ve left out there) and anyone whos parents won’t be able to own an investment property because if your scenario came to pass (A majority of families in Australia owning an investment property for each child) the rate of inflation in housing would be completely uncontrollable. All that equity out there in these millions and millions of investment properties!

    If we were starting from the premise of every family in Australia ALREADY owning a house which they can use the equity from to buy multiple investment properties for the kids, that might work (It would of course widen the gap between middle-class and lower, but you won’t mind that), but what on earth are those who don’t already own a house and have equity, or those whos parents won’t be able to do that for them supposed to do? Immigrants would never own property, those whos parents were poor would never own property.

    The market is supposed to work so that anyone who works hard enough can get ahead. Your market scenario is predicated on the idea that it would be necessary for children to have a property given to them to get anywhere. A market where new entry is not possible is not a healthy market. Any suggestion to the contrary is just plain imbecility.

  10. “As someone who three years ago mortgaged himself to the hilt to buy a house in Sydney, and who has recently re-mortgaged the same property following a relationship break-up, I sincerely hope the market remains inflated, and continues to inflate.”

    I’m sorry to hear about that, Mondo – something similar happened to me a few years ago, and I unfortunately was not able to hold on to the house. Of course, I figured that the market would never reach a level where someone on an average income would not be able to buy a house in an average suburb – but I didn’t count on the magical self-reinforcing world of a real-estate market propped up with ever-increasing amounts of debt.

    If you considered the matter from beyond your own personal self-interest, though, do you really want housing to continue to inflate to the point where nobody will be able to buy homes unless they’re given one by their home-owning parents?

    Also, check out the update to the post.

  11. “If you considered the matter from beyond your own personal self-interest…”

    I try not to comment in these threads cos there are two matters of self interest that conflict with me. 12 years ago we couldn’t get a loan, (my partner and I together) despite the fact we were both working full time 4 years casually etc etc, shortly afterward cheap credit appeared and seemingly within weeks land prices round here rocketed, and I mean rocketed. (Within 2 years we could have got loans for the same place, now worth more than double its former price, with stuff all deposit and some pretty dubious terms wrt interest rates.)

    The property we were trying to buy was less than 250K hundreds of acres of real quality land … easily an asset we could have worked and payed off. Don’t ask what its worth now, (just for the acreage alone, cos the house was pretty stuffed).

    I completely agree with your post J.

    But my parents own 2 houses. One that they live in in or around Melb, one that they rent (cheaply too) in Beaconsfield Tassie to someone who works in the mine there, but won’t be there for more than about 5 years. The Beaconsfield house is the one mum was born in, her grandad helped build it, her dad finished it, and its been in my family for over 100 years. Its just a small house on a small block in a small town.

    I suspect she wants to retire there, and I doubt she’d keep the Melb place, tho one of us might buy it off her, I doubt it tho.

    I’m saying that cos people’s homes mean a lot to them .. people put roots down in places.

    “But if the “I’m alright thanks Jack” people who bought their houses long before the boom aren’t becoming increasingly bothered that their sons and daughters are staying with them into their thirties, what will finally prompt the big party politicians to seriously tackle the problem?”

    Thats a generalisation that doesn’t apply to everyone tho, even tho on the surface it might.

    I’m only bringing this up cos believe me I agree with your assessment of the housing boom, the real estate industry and the rest of it. Especially wrt to most property investment. But there seem to be many families who maybe have one investment property and the investment may have more than finance motivating it. To me there’s a difference between that and some property investors.

    Also, spose you farm cattle? And are good and buy more than one farm? Now if those farms both have houses, but your primary motivation is to use the land to produce food should you then be unable to rent that farmhouse cos you already live in another one? Should you have to sell the farm cos of the house on it, or pull it down?

    I’m not trying to be an argumentative prick about this but I do think these thinks, and other similar concerns, may need to be taken into account.

    None of which is to take away from your points about the increasing unaffordability of Australian housing especially in areas where people want to live.

    BTW The citigroup thing is a ripper isn’t it….

  12. Yes, that is sad Mondo…

    I’ve been very fortunate, I was in a position to buy in West footscray in the mid 90s. It upsets me that younger people (some of them family or family friends), who are earning more than I was back in the day cannot afford to get into the housing market.

    I caught something on SBS last night, economics bores the shit out of me but the story seemed to be saying that the higher values rise the bigger the crash is going to be. From a personal perspective I’m not worried about my house losing value, i’m not selling.

    The REAL problem from my pinko perspective is that here especially (Au), housing is a commodity first and a home second. We have negative gearing that rewards the fortunate.

    “Let’s lynch the landlord
    Let’s lynch the landlord
    Let’s lynch the landlord
    Maaaaaan!”

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