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The housing market and the death of Australia

"This issue is not the cost of building nor dwelling sizes, but the economic and political conditions which are fuelling the bubble. Policies which promise to build low cost modest housing, or any policy which increases density will only drive prices higher and worsen the situation. By reducing dwelling size, the premium paid for land increases and land price increases. After all, the bulk of the cost is the land, as houses can still be built for under $200,000. The high land price due to flooding the market with credit and speculation, not the size of the houses built. So reject any policy about increasing density or providing smaller "more affordable homes". [...] In the current climate the only result of making dwellings smaller, is to make people take $600,000 loans for 2 bedroom units instead of three bedroom houses. The market will simply price the smaller properties at the same price as the larger ones they replaced."

The housing bubble is one of the the biggest financial threats to Australia, and is still inflating [1]1. Our banksters still refuse to admit that there is a bubble, preferring to state that there is just a bit of "froth" on the market.

"I don't think we have a housing bubble overall, but there's some froth in the Sydney market and some of the potential house purchasers need to be wary,"

says HSBC bank's chief economist for Australia and New Zealand Paul Bloxham.[2]
When you hear language like this, where euphemisms replace straight talk, you can be sure that you're being served buffet proportions of horse manure. Mr Bloxham is either lying or ignorant, and therefore either no longer feels it necessary to make an attempt to give legitimacy to the lie, or is so out of touch with our economy one has to wonder how he could have even have an entry level job at HSBC let alone be chief economist. It is not just mere coincidence that the West is struggling financially and in economic decline and that neo-liberal economists like Mr Bloxham are relied upon for advice and commentary.

Australia is now a one or two trick pony, relying on increasing private debt to keep our economy afloat (in this respect, we are not unique) and mining. With our banks greatly exposed to the real estate market, we cannot supposedly afford a popping of the bubble. So it is expected they will deny a bubble exists, no matter how ridiculous and laughable such a statement may be. The banks simply cannot admit there is a bubble, that would be suicide for them.

The Australian "property" market (these are our homes) has been in a bubble for years now and has defied, so far, predictions of a crash or severe correction. The fundamentals behind these dire predictions were sound, but didn't take into account Australia's specific peculiarities, or that the government would take further measures to prevent a correction. If this was any other country, the market would have corrected by now, but it hasn't, and this is due to the following factors.

• High immigration rates which push demand. There are many reasons for high immigration, but finding new debt fodder is undoubtedly one of them.

• Cultural obsession with property. Property has an image of being a guaranteed wealth generator and property investment is almost part of the culture. Criticising property as some kind of miraculous credit machine is tantamount to criticising the very core of Australias success and pride. Another aspect is that the industry conditions people to accept property and features which would be considered ordinary and banal overseas, as exceptional here, thereby giving the impression that a premium should be paid. Backyards, once typical are now attracting premiums and pushed as exceptional features than a basic fixture.

• Negative Gearing. Negative Gearing allows investors to bid up house prices, knowing that the tax payer will cover the shortfall. A property purchased for rental returns would have its value weighed up against its earning ability. With negative gearing, the property can be overvalued and the tax payer subsidises the overpayment.

• Lack of information and transparency. Banks, the media, the Real Estate Industry and the government itself have obfuscated the market, spreading misinformation thereby giving buyers misplaced confidence that prices are based on "fundamentals", and not based on debt and cheap credit. The media push articles to 'spruik' the market, using nonsensical phrases such as "sideways growth", "softening" as well as fear and speculation to push people into the market. The threatened removal of the First Home Buyers grant causes people to purchase before the grant ends to take advantage of it. The FHB grant has ended how many times now?

• Low interest rates. There are other reasons for this, but the necessity to keep rates low to allow people to afford a bigger debt cannot be overlooked. Rates cannot return to their historical mean without upsetting the market. Add to this, Australia's willingness to take on high levels of private debt and an odd lack of fear of doing so. We have among the highest level of private debt in the world.[3]

• Poor urban planning. This includes limited land release, poor planning of infrastructure and likely cronyism and corruption between government and developers.

• Escaping the GFC, which has enabled further cheap credit to flood the market and therefore allowed Australians to ignore the risks of taking on crushing debt.

Where to from here

So where will this lead? What will burst the bubble?

The most important factor here is the obsession with property, and the 'mania' that Australia, and its establishment have with it. It is from this, that the baffling continuation of Negative Gearing, sky high immigration rates and poor planning stems from. Any other market would have corrected itself by now, leading to a deflation of prices, but the irrational mania surrounding our market has prevented this, aborting sound analysis and realisation of the problem. The market is irrational, and its participants are determined to remain irrational.

Being blinded to the major financial risk and refusing to acknowledge the irrationality, we've chosen to march ahead. As Australians are unlikely to push for a political solution for various reasons, including apathy, acceptance of the Real Estate spin and fear, the situation will continue.

This leaves two possibilities from here on in.

The staggering propaganda effort regarding property will continue, as the Australian market is small and easily coerced in such matters. Concentration of media power, and lack of media diversity inhibits the flow of information, and complicity in most levels of power and influence keeps the message uniform and monolithic. Therefore a correction is unlikely to result from investors realising the risk and bailing out. The correction will be forced, that is, we will hit a brick will with regards to one of the fundamental drivers fuelling this bubble.

These drivers are new entrants into the market who can go further into debt to pay higher prices. Subdivision has done much to push this further along. Dividing traditional 1/4 acre blocks into units, each of which is priced carefully to be just within the level of affordability can keep prices at the "sweet spot", which is just within the level of affordability, just low enough to be affordable, with free standing houses priced high enough to be only within reach of investors. It is for this reason that the market is now largely investors, many of whom are subdividing. Free standing properties are largely unaffordable, and those who afford them subdivide them for profit, further raising prices. This could potentially go on as long until the last free standing property is remaining, but quite likely to hit a limit sooner.

It is important to note here, that subdivision is a self defeating investment activity. A property which is worth money to an investor (due to the ability to subdivide) is turned into a property in which investors are less likely to purchase, due to the fact they can't be subdivided further. Investors are relying on owner occupiers and new home buyers in the current market to purchase the produce of their investments, but the market is only worthwhile for investors to enter and not first home buyers (who may be better of financially renting). A ponzi scheme needs new entrants, and this market is shutting them out.

But prices can't go up too fast, not faster than the ability for people to service debts. That "sweet spot", which investors in a tight market can price their poorly built hovels at, has to go up fast enough to bring enough money into the market, but not too fast as to leave out home buyers. With stagnating wages, this leaves few other options for people. These are, assistance from parents and pooling with siblings and friend, both of which have increased in the last few years, a sure sign of an overpriced market. Also, foreign investment has kept the bubble afloat. Without foreign investment and the corruption and flouting of FIRB guidelines, the market may have corrected some time ago. Foreign investment makes up for a potential shortage of people able to go into debt Australia, be essentially off-shoring the debt creation. Foreign residents are doing the job Australians won't or can't do, that is go into ridiculous levels of debt for basic homes. This is also reliant on interest rates remaining low (they can't go up at all now), or lowering, which puts the RBA in a problem. They need to use the lever of interest rates to control the economy, but now can only go one way. Do not expect to see any significant interest rate rises. Interest rates will remain low until the next financial disruption.

Essentially, the bubble will continue until it hits a brick wall, when the rise in price finally pushes out enough home buyers. The crash will therefore be forced due to the inescapable financial reality, rather than a correction due to changing market conditions. It is not clear when this will happen, but there may be a few years left. The end result will be a disaster for Australia. Our banking sector will have lost much credibility and Australia has little going for it other than mining and the FIRE industries. Without prior economic reforms or economic restructuring, this burst has the potential to push Australia into very hard economic times. Also possible, is an external factor, such as a worldwide GFC, or economic trouble in China.

The second option is that the bubble will not burst, and that Australia will continue to subdivide, use mass immigration, and that social and cultural changes will occur. These are, smaller and smaller dwelling sizes, reduced quality of life, more and more house sharing, where multiple couples live under the one roof and a general decline towards third world conditions. Foreign investment, and a reluctance to enforce regulations with regards to this matter, could increase, resulting in us put into a situation where we are paying foreigners and foreign banks rent to live in our country (this is already happening now). Do not underestimate the level of treachery our officials will go to. In this scenario, rather than wear the cost of the housing bubble financially in terms of economic costs, the cost is worn through loss of quality of life and loss of sovereignty. After all, the massive prices and 'profits' is merely the selling of our future quality of life, with the proceeds of the sale being brought forward and pocketed by a few. All Australians are essentially giving up quality of life, having it liquidated and sold, and turned to cash profits for the investor/parasite class. This alternative scenario allows the bubble to remain, with the price paid for maintaining the bubble being the conversion of quality of life and of social cohesion back to money. Whereas previously we have spent money to improve the quality of life, we are now doing the reverse, converting that hard earned quality of life back into cash payments. It's easier to concentrate this wealth into a few pockets when it is in the form of transferable funds. We can sell social stability, community continuity, space, health, mental well-being, social mobility, pride, culture and freedom to prop up the bubble, which will transform Australia from an egalitarian society to one resembling the landlord/serf arrangement of feudal Europe, but with modern trappings and far better propaganda engineering consent from people. Lets hope this doesn't happen, but an indefinite continuation of escalating property prices will have far reaching, negative social consequences. While European countries can make landlord/tenant arrangements work (due to the ability to sign very long term leases and protections for tenants and a view of housing as a right), Australia doesn't have the culture to make such an arrangement successful here.

These two scenarios seem extreme, but the housing situation as it is today, is extreme, and extreme problems force extreme solutions, however they may end up being solved. If only Australia had the foresight or sense to keep the market in check. Either way, our economy cannot survive if the market is continually geared towards serving the parasitic class (specuvestors) over the productive class (workers trying to house themselves).

Possible Solutions

So how do we solve this problem?

I think that lobbying government by now is a useless endeavour. There is simply no way that politicians, who are personally profiting from property investment will take a personal loss, let along go against their backers and mates. It is indeed cute to see Australians who think that politicians may still act in their interests in this day and age, but there is too much at stake for any political solution to be considered feasible.

These are recommended courses of action.

Firstly, vote for parties which offer to resolve this issue by means other than providing cheaper built housing. This issue is not the cost of building nor dwelling sizes, but the economic and political conditions which are fuelling the bubble. Policies which promise to build low cost modest housing, or any policy which increases density will only drive prices higher and worsen the situation. By reducing dwelling size, the premium paid for land increases and land price increases. After all, the bulk of the cost is the land, as houses can still be built for under $200,000. The high land price due to flooding the market with credit and speculation, not the size of the houses built. So reject any policy about increasing density or providing smaller "more affordable homes" or any policy indicating the necessity of doing this to improve affordibility. Policies which consider increased density and smaller homes as a means of increasing affordability, only continue the problem, as it proposes an ameliorating measure as a solution. Look for parties which address the factors driving up house prices as listed earlier in the articles. Parties which address our globally high growth rates, tax concessions for investment (Negative Gearing, CGT Concession), debt based banking system and foreign investment. It is critical that the party recognises that it is land price, not house price which must come down to improve affordability.
In the current climate the only result of making dwellings smaller, is to make people take $600,000 loans for 2 bedroom units instead of three bedroom houses. The market will simply price the smaller properties at the same price as the larger ones they replaced.

The failure of providing smaller homes to ease affordability is clearly evident. Despite the proliferation of subdivided units and apartment towers, prices are still going up, and housing affordability is still degrading. Clearly, as evidenced by what is happening around us, making smaller, "cheaper" units to help people isn't working at all. Worse still, property spruikers convince investors who buy up decent family homes and bulldoze them to make units, that they are doing the market a favour by providing a 'cheaper' home.

This rules out Palmer United, the Greens[4], One Nation[5], and the Labor party[6] , and obviously, the Liberal party. The Greens do have a policy of partially implementing the Henry Tax review, but likely not to go far enough. The Sustainable Population Party have a reasonable policy and Family First do well highlighting the cause of the issue and provide good discussion and analysis, but with a simplistic solution. [7], [8], [9]
Secondly, the property mania should be undermined. Undermining the mania doesn't mean spreading lies, but exposing the problems within and giving buyers and investors a clearer image of the problems. This can involve attending open for inspections and auctions, and passing out flyer's highlighting the social issues, or highlighting the bubble nature. Information should be disseminated regarding the true extent of foreign investment, and the complicity of the Real Estate industry in turning a blind eye to possible flouting of our Financial Investment Review Board (FIRB) regulations.

Also as part of this, is reinforcing and publicising the fact that the current panacea to the affordability crisis, having investors bulldoze large homes to build multiple small ones, is not working at all and that subdivided homes cost more per square meter of space than the original free standing dwelling cost. Further to this, the subdivided property is not likely to be sold to an investor, who is the one most likely to be able to pay a decent price. The propaganda that is spread to people, that this activity helps people must be countered, and the argument put forward that activities to 'help' people into homes (such as buying investment properties to rent out, subdividing) have no evidence of them working and are doing quite the opposite. Many investors are suckered into believing that they are doing the nation a favour with this activity. This lie should be busted.

This will attract a lot of negative attention and accusations of people being 'bitter renters', or 'losers who are upset they can't afford a home', and suggestions that people simply move further out. There is enough information to demonstrate that the property market is in a precarious bubble, and people should stay on message and continue to disseminate this message, than get sidetracked answering spurious accusations. It may seem mendacious to engage in such acts, but the earlier the correction, the less the impact. That is to say, the sooner people come to their senses, the better for all of us.
Thirdly, the plight of young Australians should be brought to the fore. Most people my age and younger, are deeply concerned about house prices, yet despite this being one of the biggest issues we face, the media are conspicuously silent. At best, they put a tepid "we feel your pain" article every year which proposes no solution, nor even suggests that a solution should be sought or demanded. This silence has to be broken, and it will only be broken by forcing the media to address the issue, and this can be forced by creating media worthy events (such as activism at open for inspections, etc), or social media chatter too big to ignore. Unfortunately, prominent mass activist groups don't seem to care, as housing affordibility doesn't come under the typical repertoire of concerns that activists have.

Australia is in a reasonable financial position currently, as we should use this opportunity to bring a controlled correction rather than wait for an uncontrolled, chaotic and unpredictable correction. It would be far better for the government to use policy to deflate the bubble, as it would then be able to have some control over the process to minimise the disruption to people and the shock to the economy. Deliberately done, by phasing out Negative Gearing, various concessions, reducing immigration according to a timetable which is rigidly stuck to, those invested in the market would have time to adjust and plan from the transition from an economy based on speculation on property to some other, hopefully more productive model which will have other ancillary benefits. Investors could divest their portfolio on their own terms and those who have property as a nest egg would have time to consider alternative options. Banks could plan for the reduced prices. Without this controlled correction, we are essentially at the mercy of circumstance, with unpredictable results, and the chaos that would result from this.



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The real estate Ponzi scheme is out of kilter with the rest of our economy, State wise and Federally. With a budget surplus restrictions, and cuts to spending such as for welfare and State funding of education and health, adding more people through increased immigration is all about inflating the housing bubble even further - with blatant disregard for the fact that house prices can't be sustained! Once the housing bubble bursts, we'll end up with more unemployment, homelessness, and social fallouts.

The housing Ponzi scheme is disguising the real weaknesses in our economy, and the lack of productivity. It's easy to keep floating the housing bubble on the back of high immigration, but the costs are forced back on the rest of the population to bear, with joblessness, increasing costs of living, unaffordable housing, and infrastructure debt. The housing bubble is a threat to our economy, and it's all about giving free rein to the banks, builders and property developers for the short-term - and to hell with the future!

Neo-liberal economic thinking can no longer distinguish between wealth creation and asset price inflation. When a block of land increases in price due to immigration, low interest rates, easy credit, what have you, this does NOT reflect any increase in the utility or productivity of that property.

This is a major failing in our economic thinking IMO. The inability to treat value and price as two separate concepts, and idea that does go back to classical civilisation. Our modern view conflates the two, so that asset price inflation is taken to be creation of wealth. But it is really transfer, not generation of wealth. Think of rising property prices as a giant vacuum. If the price goes up $200K, then that acts as a giant $200K vacuum that has to hoover up that productivity and wealth to sustain itself. That may come from future living, from todays' economic malaise, and it is hoovered with interest. It has to do this, because there is no real wealth creation to back it up.

In the end, the dollars matter none. What matters is aggregate production of goods and services, and design. We've forgotten this, and think if the numbers are high, it's good. We are forgetting how to maintain a civilisation.

Everyone seems to like blaming the banks for this -- but it isn't them at all (have recently worked at one of big 4, now at another - trust me, they have no idea what they are up to - they are just listening to the man..)

The man, in turn, is trying to make the corrupt average Aussie happy - a white bloke who wants to never stress out, do very little - and end up a millionaire miraculously.

So how do we make this happen - well, just keep inflating sh*t to death - that same bloke seems too dumb to realise by pricing himself out of his own house he isn't actually winning (but then again if he were smart he'd never left Britain, right - it wasn't the clever ones that were sent here, let's not beat around the bush)

Then we nicely invent how we need immigrants - which is in fact only to fill those houses so white blokes can get paid good for building 70s styles dwellings - so all of Australia gets to pay the price of their lack of education or ability to do something smarter (but then the smart ones from Britain - well, see the previous point on this)

And then we blame it on the banks and the immigrants - so the same white uneducated bloke can feel smug about cheating the system into making him a millionaire while he's out surfing - a feeling he desperately needs (due to the same point about his less-than-stellar relationship with Britain - again)

This is nothing but 'dumb commoner' mentality at work - if you look at republics - democracies even, housing prices are lower - people there KNOW they ALREADY own the land by virtue of being its citizens, so why would they indebt themselves to buy it again? In a dumbed down former colony Australia - commoners stuck in the past still feel like land is almost unobtainable (see relationship with Britain reference - even smarter poor souls there suffer the same - courtesy of the assumption land is always owned by the crown) - and so media happily sells them an idea they can relate to - that they are not worthy of owning land - and then sells them the carrot on a stick how if they get into the ponzi they will end up worthy citizens - something the general lack of esteem or intelligence swallows like the best candy jo bloggs commoner could possibly imagine.

So the real question is - does Jo get to wake up before his kids are obliged to speak Mandarin - or is he dumb enough to celebrate his own demise? The time will tell...

Editor's response: I do not understand much of your post, Peter. I also don't understand why you have posted it here and fail to see what in the article and above comments this is responding to.

No-one here has just blamed the banks alone, but, nothwithstanding your claim to the contrary as a former bank employee, it seems to me that banks, together with property speculators, real estate agents and land developers, are complict in having made housing so unaffordable in recent years.

Whilst I can agree with some of what you have posted, I object to your claim that that ordinary "corrupt [white] average Aussie" hopes to gain from housing hyperinflation.

Former Prime Minister John Howard on one occasion put to the newsmedia in 2006 (or 2007) that ordinary home owners welcomed high immigration because of the way it drove up the value of their own homes. Whilst some individual home owners may have fallen for that argument back then, most have woken up to the fact that unless they wish to move to where there is less public amenity in the far outer suburbs or to a distant country town, the increased market value of their homes only adds to their living costs including higher council rates amongst other things.

Thanks for the editor response, clarifying. I too find the 'It's not the banks' comment a bit confused. But it's interesting to see how people perceive things. Peter James may be perceiving things from his own situation and he may not meet many homeless or struggling. I think that if you work in a bank or any big growth focused institution you probably get the idea that people have more control than they really do. And the people who speculate on their family home probably do delude themselves with the propaganda the government and banks put out there.

Dennis K's original post on housing affordability is excellent and IMO correctly identifies many of the causes of the housing affordability crisis in Australia's major cities.

With that said, I'd take issue with one small point; that being the role played by low interest rates. The key problem facing Australians today is that housing is unaffordable. Affordability entails more than just the price of the property. For the vast majority of us who need a mortgage to buy a home, affordability is affected by (1) the amount borrowed to buy the property, (2) the borrowers capacity to repay the loan - ie their income and (3) the interest rate charged on the loan.

Dennis notes that low interest rates have allowed borrowers to obtain bigger loans and that this has, in turn, contributed to the rising cost of property. This is all true. But what would happen of interest rates were to rise?

Firstly, those with existing mortgages would be placed under greater stress, because the cost of servicing their mortgage would increase and most wage earners are not in a position to easily increase their incomes to compensate. The extra repayments required will likely have to come from reduced savings or, more likely, reduced spending in other areas.

Secondly, the price of property might (?) come down because buyers could no longer afford to borrow as much as they had in the past. But here's the thing. The only reason that they can't borrow as much any more is because with higher rates of interest, the amount that they can afford to borrow and repay is reduced. The monthly mortgage repayments over 25 years are the same, whether you borrow $250K at 4% or $171K at 8%. So even if property prices were to fall by an astounding 20%, housing would still be less affordable than today if interest rates were around 8%. Lower house prices don't help with affordability if your monthly mortgage repayments stay the same, or go up.

Thirdly, who benefits from higher interest rates? The standard answer is those who have savings invested with the bank. But this is not at all accurate. The vast majority of money loaned out by banks is not your hard earned savings, but rather new money that is created ex nihilo (from nothing) by the banks as a book keeping exercise. When you make a repayment, the principle component of your repayment is written off the books (destroyed) by the bank in the reverse process to that by which it was created. But the interest component of your repayments is not written off, it is retained by the bank and used to help meet the costs of the bank, to pay investors interest on their savings and to generate dividends for the shareholders of the bank.

So, if interest rates on borrowings were to rise, it's possible that banks would increase the interest paid to savers but IMO more likely that most of the benefit would be dished out to shareholders as fatter dividends.

In any case, while a rise in interest rates might - possibly - lower property prices, it would be very unlikely to result in an overall improvement in affordability.

The effect of interest on the economy has been closely studied by Ellen Brown and also Anthony Migchells, both of whose writings can be easily found on the internet.

The other initiatives proposed in Dennis' article are very sound, I think. A reduction in immigration would have wider benefits than just those related to housing affordability, as would a major change to the way that negative gearing applies to property.

It is true to argue that as interest rates rise, the cost of the mortgage may stay the same. What would happen is the cost would shift from principle to interest but overall remain steady.

So for home buyers, there isn't much relief. But as the balance shifts to interest, prices fall. Falling prices will act as a disincentive to speculation and to foreign investment, which will bring on further falls. Why invest in a asset which will fall in price?

I've noted that as rents are falling, real estate agents are using 'tricks' like offering gifts, instead of lowering rent. The purpose is simply to keep the rent cost the same on the books, and lower it without admitting it is falling. Perception is very important.

If home prices fall, watch for "rebates", "gifts" and "concessions" in place of a simply lowered price. All this to make the market appear steady.