It is tempting to think that property prices are rising because there aren’t enough houses.
However, this cannot explain the sudden start from 2000, the sudden start from around 2013 and now again – contrary to expectations – the stratospheric start after the COVID recession.
By and large, we have enough houses. The 2016 census found that we had 12% more homes than households, up from 10% in 2001.
That is 12% of our houses and apartments – they are used as holiday homes and second homes or are waiting for tenants.
If there really weren’t enough houses for people who wanted them, it would be more than a spike in house prices. it would be rents.
Instead, total rents have barely moved for half a decade – they are even growing more slowly than wages.
Rental price index versus wage price index
ABS wage price index, rental price index from consumer price index
For the half-decade from 2016, half a decade in which the Australian population grew by more than a million, Australian rents barely moved.
The supply of housing has kept pace with the demand for housing, but the supply of housing has not.
More landlords, more tenants
If that sounds strange, keep in mind that people want to own homes for reasons other than living.
Since around 2000, many Australians (and foreigners) have wanted to buy them in order to rent them out. You wanted to become a landlord.
Rents, not prices, are the best way to gauge housing supply and demand
Twenty years ago only one in 15 of us was a landlord. It’s one in ten now – more than two million of us.
To get these properties (other than where they were built) they had to outbid the people who would have bought them to live in at auction.
They helped start their own tenants while raising prices.
We’re leaving Menzie’s legacy behind
From Robert Menzies’ resignation as Prime Minister in 1966 to the late 20th century, approximately 71% of Australian households owned the house they lived in – one of the highest rates in the world.
Own use has been falling since around 2000. The latest figures (even a few years old) put them at 66%.
For 35 to 44 year olds it has fallen to 63%.
During that time, the cost of buying a home has risen from two to three years of after-tax household income to three to four years.
House prices as a percentage of disposable household income
Core logic, ABS, RBA
What apparently started the matter was Prime Minister John Howard’s decision in 1999 to cut the capital gains tax rate in half. Not that the committee he asked to investigate the idea recognized the possibility at this point.
The Ralph Review recommended taxing not half but half of any capital gain, rather than the portion above inflation, as has been the case since capital gains were taxed.
The rationale was that this would “encourage higher levels of investment, especially in innovative, high-growth companies”.
A rush for real estate instead of high-tech companies
The review was correct about the change encouraging investment but incorrect about the type of investment.
Instead of buying shares in innovative companies, Australians bought rental properties like never before.
If they offer enough, they could borrow enough to orient themselves negatively; to ensure that their interest expenses exceeded their rental income and caused them annual losses, they could offset these against wages that would otherwise be taxed at high rates.
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The negative gear was nothing new. It was allowed from the start. What was new was the possibility of selling the property later for a profit, as only half of the profit would be taxed.
Investors could offset all of their losses and only tax half of their eventual profits.
Pretty soon, more than a third of the money borrowed each month for housing went to landlords. For some dizzying months in 2015, it was 45%. The first home buyers fought for competition.
In 2016, then-treasurer Scott Morrison lifted the prospect of reversal, saying negative gearing had led to “excesses.”
APRA cleared what our leaders couldn’t
Labor participated in two elections that promised just that, and the coalition publicly supported the practice.
Behind the scenes, Australian regulators used their power over lenders to enforce lending to landlords and cut them to 27% of new home loans ahead of COVID.
APRA managed to ease price pressures where politicians couldn’t.
But that’s far from the whole story. There are other profound reasons why house prices are rising, and they, too, have little to do with demand for accommodation.
Zoning is not to blame for soaring property prices in Australia
From around 2014 prices rose again and rose from three to four years of household income to four to five years. Back then, after years of mining boom, Australians got richer and could borrow more cheaply.
Homes in general may not be a good investment (there is a growing supply), but homes in prime locations were permanent as there were only so many good locations.
And then it fed on itself. The father of modern economics, John Maynard Keynes, described investing as a game where the best strategy is not to put money in what you think is worthwhile, but in what you think is worthwhile. what other people think is worthwhile.
It’s happening again
He spoke of a third grade where “we use our intelligence to anticipate what average opinion the average opinion expects,” adding that there may be a fourth, fifth, and higher grade.
It’s happening again. With mortgage rates at new extreme lows and the fact that wealthier Australians have emerged from the crisis with assets intact, it makes sense to do what others are doing and raise purchase prices before others push them higher.
It has nothing to do with the housing shortage, but for many it will push house prices further out of reach. That’s because living in Australia is two things: housing and a form of speculation.
By Peter Martin, Visiting Fellow at the Crawford School of Public Policy at the Australian National University
This article, House Prices Are Going Up Okay, But Not For The Reason You May Think, is republished by The Conversation under a Creative Commons license.
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