Is an addiction to property stifling the economy?

Housing as a wealth generator drains investment from other areas

Sydney and Melbourne voters who took part recently in focus group research conducted by Ipsos had a long list of complaints about the cost of living, but it was soaring house prices that attracted the greatest ire. Younger voters feared never being able to buy a home, while older voters held the same fears for their children.

It’s not news that Australians are worried about housing affordability. In recent years, householders have been carrying ever greater mortgage debt in pursuit of the Great Australian Dream, while key workers such as nurses and police can’t afford to live near their work.

House prices have continued to soar well ahead of income growth and have risen so sharply in Sydney the city is now among seven rated with an intense “bubble risk” by the UBS Global Real Estate Bubble Index.

The Ipsos respondents blamed immigrants and foreign buyers, but economists and others point to poor planning and a tax regime that rewards property speculation as the culprits behind unaffordable housing.

But are there deeper roots? Is the belief that rising prices are good for owners, speculators and the economy actually damaging the economy?

This dilemma energised a debate at UNSW Business School’s 2017 Festival of Outrageous Tax Ideas, held in Sydney. The experts who gathered to discuss the merits or otherwise of stamp duty and land tax broadened their discussion to include the unsustainability of Australia’s housing market.

Australia does need to temper its “addiction to property”, says University of Tasmania professor Richard Eccleston, who delivered a paper about stamp duty to the festival.

“We need to ensure that with the next cycle we don’t continue down this path of what is increasingly being called in the literature ‘residential capitalism’, where property investment and speculation becomes really important and central to our economic and social activity,” notes Eccleston.

“We know there are a range of economic and social consequences with that strategy.”

‘Housing has become a sink hole for investment that is not producing anything for the economy’


Vehicle to create wealth

Those consequences include not just unaffordable housing but a national, tax-induced obsession with residential property from both owner occupiers and investors that risks underinvestment in other areas, such as manufacturing, innovation and entrepreneurial businesses, according to Bill Randolph, a professor and director of the City Futures Research Centre at UNSW.

“Housing has become a sink hole for investment that is not producing anything for the economy,” says Randolph. “Most of that investment does not build a single new home.”

The dangers of housing being viewed primarily as an asset from which to generate wealth, rather than simply as a place to live – being bought and sold for capital gain, leveraged to purchase other assets, or as security for general consumption (the house as ATM) – has been discussed by housing academics for years, says Randolph.

“There is growing recognition in comparable countries that housing has become a financialised asset, but banks have such a huge proportion of their loan book in housing that it has become almost impossible to unpick,” he says.

The “Anglo Saxon disease of over consumption of housing” isn’t replicated everywhere, Randolph points out. In Germany, for example, the housing market is stable and affordable, banks invest in productive enterprises rather than squirrelling money into the housing market, and the economy still benefits from very high productivity.

But in Australia a favourable tax environment and a powerful property development industry have helped fuel housing speculation, he says.

“There has also been a shift in psychology by the mum and dad investors ... Housing has become a vehicle for mums and dads to create wealth.”

Housing prices are now so high in Sydney and Melbourne they are becoming a barrier to economic activity, Randolph says, citing indicators such as less fluid labour markets in those cities as evidence.

‘People should look at the relative cost of what they are buying versus what they earn’


Part of a longer-term trend

Nigel Stapledon, former chief economist at Westpac and now chief adviser at property advisory consultants Macroplan-Dimasi, doesn’t see any merit in blaming high prices on something as nebulous as “residential capitalism”.

The decision to buy a house to live in has also always been partly an investment decision, argues Stapledon, who teaches real estate economics and public policy at UNSW Business School’s Centre for Applied Economic Research.

He says it has also been a sensible part of a retirement savings strategy because it means people don’t pay rent when they retire.

What’s changed is that more property is owned by individual households than in the 1950s, both as owner occupiers and landlords. Up until then, the private rental stock – representing almost half the housing stock – was held by a much smaller number of wealthy landlords, Stapledon says.

“Has this wider spread of ownership caused high prices? Hardly.

“The issue is not unique to Australia,” he adds. “London, Toronto, Vancouver, coastal cities in the US, they are all experiencing it too, and it is part of a longer-term trend that started in the 1950s.

“I would say prices are high because of constrained supply bumping up against strong population inflows into these high-amenity cities,” says Stapledon,

“I would look at institutional factors such as ‘nimbyism’ in local government planning, for example, as a very major constraint on supply. On the demand side, the current historically low interest rates also mean higher prices.

“But there is an element of risk in the market,” he adds. “Many people think prices will always go up, forgetting that even in Sydney, Australia’s hottest property market, high interest rates in the 1980s brought housing prices tumbling down.”

Obsessed with residential property

Richard Holden, a professor of economics at UNSW Business School, agrees there is an enormous advantage to individuals to invest in residential property.

“You can get a 10 to one leverage, plus capital gain. It is hard for ordinary people to invest in bonds and stocks and get the same leverage,” Holden says.

But that suggests there is too much money and an uneven playing field for residential property, he says.

“If you look at a magazine or a newspaper on the weekend and you see how much space is devoted to articles about trading residential property or renovating property compared with the space given to other issues, you can see we are a nation obsessed with residential property,” says Holden, who has called for negative gearing and first home owner grants to be abolished to help take steam out of the market.

As for professional investors, it’s not easy for them to take a negative view on property because of the way they follow stock market indices and because banks are so heavily invested in residential property.

“If there is a bubble, it is not obvious what to do about it.”

Sydney is now the world’s second most unaffordable major housing market, after Hong Kong, and Melbourne is sixth, according to the 2017 Demographia international housing affordability survey.

“That is obviously a bad league table to be in and that happened some time ago,” says Holden, who believes if people were more financially educated they would realise rising house prices were not always a good thing.

“People should look at the relative cost of what they are buying versus what they earn,” he says.


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