House prices
There’s been some discussion of late about what’s wrong with the housing market in Australia here and here.
The simple facts are these, house prices have grown enormously over the past years, but inflation has remained very low in global terms (~3% or 4%). Inflation cannot account for the rapid increase in house prices.
Many property owners went through a spate of renovations in the early naughties, whilst a renovation will add some value to a property it can’t account for the tremendous increase we’ve seen in this country – after all you can’t transform a $250k house in to a $400k house just by putting in new floor boards and giving it a lick of paint.
The cost of actually building a house (i.e. the materials and labour) is pretty affordable (and always has been) and costs have not risen much at all in the last 10 years. The cost of building cannot account for the rise the price of houses.
Land is the commodity that has risen dramatically in price. Why? Do we have less of it than we use to? Has our population suddenly spiked as during the baby boom? No. Average lot sizes are now 1/8th of an acre, the ¼ acre block is a distant memory. Land prices have grown even in those states that see net emigration to other states outweighing their net immigration from other states.
The only rational explanation for the rapid rise in the cost of land is speculation. Very little real value has been added to the cost of land over the past ten years and such value as renovations might have added cannot account for the continued increase house prices because a after a period of time the market will have priced those renovations in to the price of houses and prices will plateau, especially if they were widespread and some time ago.
This situation is aided and abetted by governments of both persuasions and at both federal and state levels. First home owners were given $7000 of money for nothing under Howard and this continued under Rudd. Indeed this was tripled for a period of time during the GFC and the $7000 giveaway continues to this day. In addition, federal governments of both persuasions have retained negative gearing (a tax practice that is illegal in most of the rest of the word barring New Zealand and Canada) and kept Capital Gains Tax at absurdly low levels, even as incomes and asset prices rose. Both of these things encourage speculation, as does the government’s 100% backing of virtually all bank accounts. It might have made sense to sure up confidence in the banks by backing deposits during the GFC but it makes very little sense now. States seem uninterested in promoting density, instead releasing land that was previously zoned as semi rural thereby promoting urban sprawl and which doesn’t attract first home buyers who presumably would like to have something approaching a reasonable commute to and from work.
We hear screams from the property developers about a piddling 1.9% decrease in house prices in Perth, the way they were carrying on you’d think it was the end of the world. First home buyers are told to “get in now” so they “don’t miss out” on the market even though the price (not the cost mind you) of houses continues to outstrip yearly incomes manyfold and is continuing to grow. All of which is classic bubble behaviour.
When a capital strike is suggested (which will probably be ineffectual in itself) those baby boomers who have benefited most from the status quo turn around and sneer that the people signing up to it on the website couldn’t afford it anyway (I could for one but that’s besides the point). If that were genuinely so, the reaction would have to be described as pretty hysterical, as you’d except when prices are overinflated – a collapse in the value of their investment properties would do them serious financial damage and in a bubble, perception is everything. Herd psychology doesn’t have to be rational but damn it’s powerful.
It seems unlikely that either the Labor or the Liberal parties would be brave (in the way that Sir Humphrey Appleby would use that word) enough to tackle the negative gearing and CGT rorts on their own, let alone be mature enough to put the national interest first and adopt a bipartisan policy of enough’s enough when it comes to negative gearing and CGT so we’ll be waiting for some little psychological spark like, say an online capital strike petition to bring down the ponzi scheme that is the Australian real estate market. Here’s hoping…
The simple facts are these, house prices have grown enormously over the past years, but inflation has remained very low in global terms (~3% or 4%). Inflation cannot account for the rapid increase in house prices.
Many property owners went through a spate of renovations in the early naughties, whilst a renovation will add some value to a property it can’t account for the tremendous increase we’ve seen in this country – after all you can’t transform a $250k house in to a $400k house just by putting in new floor boards and giving it a lick of paint.
The cost of actually building a house (i.e. the materials and labour) is pretty affordable (and always has been) and costs have not risen much at all in the last 10 years. The cost of building cannot account for the rise the price of houses.
Land is the commodity that has risen dramatically in price. Why? Do we have less of it than we use to? Has our population suddenly spiked as during the baby boom? No. Average lot sizes are now 1/8th of an acre, the ¼ acre block is a distant memory. Land prices have grown even in those states that see net emigration to other states outweighing their net immigration from other states.
The only rational explanation for the rapid rise in the cost of land is speculation. Very little real value has been added to the cost of land over the past ten years and such value as renovations might have added cannot account for the continued increase house prices because a after a period of time the market will have priced those renovations in to the price of houses and prices will plateau, especially if they were widespread and some time ago.
This situation is aided and abetted by governments of both persuasions and at both federal and state levels. First home owners were given $7000 of money for nothing under Howard and this continued under Rudd. Indeed this was tripled for a period of time during the GFC and the $7000 giveaway continues to this day. In addition, federal governments of both persuasions have retained negative gearing (a tax practice that is illegal in most of the rest of the word barring New Zealand and Canada) and kept Capital Gains Tax at absurdly low levels, even as incomes and asset prices rose. Both of these things encourage speculation, as does the government’s 100% backing of virtually all bank accounts. It might have made sense to sure up confidence in the banks by backing deposits during the GFC but it makes very little sense now. States seem uninterested in promoting density, instead releasing land that was previously zoned as semi rural thereby promoting urban sprawl and which doesn’t attract first home buyers who presumably would like to have something approaching a reasonable commute to and from work.
We hear screams from the property developers about a piddling 1.9% decrease in house prices in Perth, the way they were carrying on you’d think it was the end of the world. First home buyers are told to “get in now” so they “don’t miss out” on the market even though the price (not the cost mind you) of houses continues to outstrip yearly incomes manyfold and is continuing to grow. All of which is classic bubble behaviour.
When a capital strike is suggested (which will probably be ineffectual in itself) those baby boomers who have benefited most from the status quo turn around and sneer that the people signing up to it on the website couldn’t afford it anyway (I could for one but that’s besides the point). If that were genuinely so, the reaction would have to be described as pretty hysterical, as you’d except when prices are overinflated – a collapse in the value of their investment properties would do them serious financial damage and in a bubble, perception is everything. Herd psychology doesn’t have to be rational but damn it’s powerful.
It seems unlikely that either the Labor or the Liberal parties would be brave (in the way that Sir Humphrey Appleby would use that word) enough to tackle the negative gearing and CGT rorts on their own, let alone be mature enough to put the national interest first and adopt a bipartisan policy of enough’s enough when it comes to negative gearing and CGT so we’ll be waiting for some little psychological spark like, say an online capital strike petition to bring down the ponzi scheme that is the Australian real estate market. Here’s hoping…
0 Comment