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plot, VM-housing, 2002-2005

The following is an article published in Online Opinion today. Dymphna Boholt, the focus of this article, released an enews on the day the ABS 8 Capital Cities index was released (revealing a national 2.4% upkick in prices) entitled “Are you accountable for your actions”.

Supply is Code for Windfall Gains

Joe Hockey points to supply as the primary housing affordability issue. He should have been sitting in the Melbourne Sofitel last week to hear The Great Real Estate Boom Ahead seminar. It was delivered by Australia’s leading property spruiker, Dymphna Boholt. Packed with 400 people on the edge of their seats, they were walked through the legal strategies to protect one’s assets and avoid paying tax whilst profiting at hyperspeed.

The audience gushed at examples of those making $120,000 in four months. A young couple assembled 16 properties within three years to land a passive income of $350,000 each year. A single mom of four set up a passive income of $500,000 a year after three years using Boholt’s techniques – ‘so can you’. Boholt states on youtube that this $500,000 is set to increase each and every year through the ability of landlords to ratchet up rents. She actually said during the seminar ‘I wanted money to come in that I didnt have to work for’.

Such behaviour is encouraged by housing policy at all levels of government. Passive income is the euphemism for what economists call unearned income – the most damaging of all income sources. Damaging because there is no constructive outcome for the income, instead forcing the productive sector into further debt to meet the payments, undermining competitiveness.

Investors chasing the elusive dollar jumped from 19% in 1993 to today’s 36% of all housing loans.

In 1993 a first home owner was borrowing an average $80,000. Today it is $292,000.

There are 6.4 million renters to just 1.8 million investors. Could politicians ignore the affordability issue if 10,000 renters dedicated just a few hours a year to protest about the shocking state of housing affordability?

The figures continue to reveal the alarming pressure placed on a society steeped in debt, for longer and with fewer prospects of ever escaping it. The ABS writes:

“Since 1994-95, the proportion of households that owned their home outright dropped from 42 to 31 per cent. Those with a mortgage increased from 30 to 37 per cent and households renting privately have increased from 18 to 25 per cent.”

Politicians have stumbled with awkward responses to housing questions during the election campaign. The Liberal Party handballs it to the states as a supply issue. The Labor Party points energetically to their miniscule dent on public-housing waiting lists. Neither side is willing to admit that lower interest rates will push the bubble higher. Nor are they willing to accept that negative gearing has failed to add to the new supply of homes. 92% of negative gearers buy existing properties, crowding out first home owners. Self Managed Super Funds are another policy trick, giving steep capital gains discounts to property investors. One might have thought that was the last of the incentives, until it was revealed this week that one can now earn frequent flyer points for buying an apartment.

Affordable housing was promised by Melbourne’s urban growth boundary extension. The city has sprawled over once fertile farm land to provide space for 1.6 million new houses. The affordability nirvana of such supply-side reform is really a codeword for windfall gains. The bureaucrats’ golden pen tick from farming to residential re-zoning creates overnight millionaires for those who own land in the right location.

In the March 2012 quarter something fishy occurred. Victorian land prices were falling significantly and there was a chance housing affordability might be possible in the sprawling outskirts. In the growth corridor of Whittlesea (Shire of Mitchell), developers removed 58% of the land from the market in just three months. This choking of supply ended the promise of affordability.

Saul Eslake is one of the few economists to speak up. He recently said

“An investor-driven recovery is much more likely to put upward pressure on prices and is less likely to induce new dwelling supply, which is the opposite of what the Reserve Bank wants, and what the country needs,”.

Similar investor-led ‘recoveries’ are occurring in the northern hemisphere, as if we’ve learnt nothing from the GFC. Much of this is spawning from the reality that Dymphna Boholt and her colleagues are doing exactly what the tax system tells them to do. Politicians will not look seriously at housing affordability until the locked out generations find their voice. Meanwhile Dymphna and her team continue their packed 15 stop national tour, building the supply of investors into an avalanche.