Why housing prices can never fail.
With the share market recording its worst year on record in 2008, people are justifiably worried about their investments and keen to see stability in 2009. However, adding to the uneasiness of caused by the share market, some of Melbourne’s poshest suburbs have seen values apparently collapse in the last six months. Some fear an American-style negative equity crisis; which is not far fetched because of the high debt levels of Australian home owners.
A prominent property developer commented to me, “We’ve seen the ASX fall 40% in the last year, its impossible that one sector of the economy fall so much and property prices not reflect it. Its just a matter of time.”
Yet, this insight is founded upon a poor understanding of how the global market economy functions. The Australian Government is a bit player in the global share market; despite the Rudd government’s largest infrastructural investments, they are essentially powerless to improve the standing of the share market. The equities market is dictated by global forces and only a concerted effort by the international community can do anything to stabilise it.
In contrast, the domestic property prices, particularly housing prices, are not the product of the global market, but of government policy. The symphony of first home buyer grants, capital gains deductions, and investment property tax offsets have created the exploitation in housing prices in the last decade. The policies of successive governments created and sustained the sky-high housing prices we see today.
And it’s a one way street. Housing prices rose, and a generation of middle-aged and older Australians benefited, whilst disenfranchising younger Australians, who salaries will never be of the level to purchase quality inner-city housing. Yet, the housing boom was created under a pile of debt and if housing prices, not just in Toorak but nationally, decrease substantially – home owners would have more debt than equity in their homes. The American-style negative equity crisis would be at hand.
Housing prices in the United States are created by market forces, as the plethora of direct and indirect government incentives that exist in Australia would be inconceivable to our fat cousins. Essentially speaking, housing prices in the United States are created by market forces whilst in Australia, they are artificially inflated by government policy.
In concert with this is the fact that there are votes in property. Unlike the United States, where most investment is in the share market, Australians invest heavily in self-managed investment properties. Every second person I run into seems to have purchased, with heavily loans from the bank, a unit or townhouse that they rent out and negatively-gear to take advantage of tax benefits. We have a national obsession with real estate, as the number of ads and articles in this newspaper will testify to.
Although not literally, there are votes in real estate. If the housing market declined substantially, voters would become uneasy with the current government. MPs should take note that the highest debt to equity ratios are in margins constituencies – on the outer suburban fringe. Thus, because housing prices are artificially constructed in this country, and an emphasis is placed on property in such large and influential voting blocs, property can never fail as an investment in this country.
Any government, either liberal or labour, will be forced to bailout any substantial fall in the property market, through increases to home buyer grants or in the various tax deductions, if they intent to get or stay in power. Unlike the share market, the state and Commonwealth governments have the power to control the housing market, which voters will recognise. Thus, like the American car industry, housing in Australia, is “too big to fail.”
A prominent property developer commented to me, “We’ve seen the ASX fall 40% in the last year, its impossible that one sector of the economy fall so much and property prices not reflect it. Its just a matter of time.”
Yet, this insight is founded upon a poor understanding of how the global market economy functions. The Australian Government is a bit player in the global share market; despite the Rudd government’s largest infrastructural investments, they are essentially powerless to improve the standing of the share market. The equities market is dictated by global forces and only a concerted effort by the international community can do anything to stabilise it.
In contrast, the domestic property prices, particularly housing prices, are not the product of the global market, but of government policy. The symphony of first home buyer grants, capital gains deductions, and investment property tax offsets have created the exploitation in housing prices in the last decade. The policies of successive governments created and sustained the sky-high housing prices we see today.
And it’s a one way street. Housing prices rose, and a generation of middle-aged and older Australians benefited, whilst disenfranchising younger Australians, who salaries will never be of the level to purchase quality inner-city housing. Yet, the housing boom was created under a pile of debt and if housing prices, not just in Toorak but nationally, decrease substantially – home owners would have more debt than equity in their homes. The American-style negative equity crisis would be at hand.
Housing prices in the United States are created by market forces, as the plethora of direct and indirect government incentives that exist in Australia would be inconceivable to our fat cousins. Essentially speaking, housing prices in the United States are created by market forces whilst in Australia, they are artificially inflated by government policy.
In concert with this is the fact that there are votes in property. Unlike the United States, where most investment is in the share market, Australians invest heavily in self-managed investment properties. Every second person I run into seems to have purchased, with heavily loans from the bank, a unit or townhouse that they rent out and negatively-gear to take advantage of tax benefits. We have a national obsession with real estate, as the number of ads and articles in this newspaper will testify to.
Although not literally, there are votes in real estate. If the housing market declined substantially, voters would become uneasy with the current government. MPs should take note that the highest debt to equity ratios are in margins constituencies – on the outer suburban fringe. Thus, because housing prices are artificially constructed in this country, and an emphasis is placed on property in such large and influential voting blocs, property can never fail as an investment in this country.
Any government, either liberal or labour, will be forced to bailout any substantial fall in the property market, through increases to home buyer grants or in the various tax deductions, if they intent to get or stay in power. Unlike the share market, the state and Commonwealth governments have the power to control the housing market, which voters will recognise. Thus, like the American car industry, housing in Australia, is “too big to fail.”
posted by Aron Ping D'Souza at
5:57 PM
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