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by Paul Egan

In the cult science fiction Matrix movies, people live within a simulated reality created by artificially intelligent machines who feed from their life energy; a dream world that has enslaved humanity due to a blissful lack of awareness of the invisible controls. The story is an apt metaphor for the FIRE (Finance, Insurance and Real Estate) sector in Australia.

The FIRE sector gorges on a banquet of debt arising from the enslaved collective Australia investor mindset, that has assimilated a carefully constructed reality decreeing bricks and mortar a fail-safe asset class because ‘Australia is different’. In the nation’s dystopian present, the docile masses remain plugged into the Propaganda Matrix and dare not swallow the red pill, lest their carefully maintained investor reality deconstructs into a non-sanctioned thought crime that questions whether land prices really are at the peak of a once-in-a-century land bubble and mean reversion is imminent.

Several factors help the FIRE sector maintain the illusion that Australian property is not over-priced and keep minds plugged into the Propaganda Matrix:

  • Auction clearance rates remain dubiously high due to conflicted reporting measures that radically reduce the number of failed auctions disclosed. There is no established relationship between auction clearance rates and the health of the broader land market.
  • The total housing stock for sale is rarely reported, particularly by number of month’s supply, a common measure in other jurisdictions. Stock available for sale is only reported for constrained markets, like Sydney.
  • Reported rental vacancy rates remain dubiously tight, an artefact of using Real Estate Institute figures from each State/Territory. These figures are based upon voluntary reporting and are unaudited. Any error or discrepancy will likely lower reporting numbers.  Markets are led to believe they are more constrained than they actually are.
  • Foreign investment is reported to be a primary factor in keeping strong demand alive and housing prices at lofty highs. Closer examination of Foreign Investment Review Board figures reveals total foreign residential property investment, however, was less than $20 billion dollars in 2011-12; a quantum insufficient to significantly influence housing prices, except perhaps select sub-markets such as the prestige suburbs of Sydney and Melbourne.
  • The mainstream media remains hopelessly conflicted due to its heavy reliance upon property advertising revenue. Buoyant opinion is preferred and private sector spin doctors provide radiant commentary of the property market at all times, simultaneously proclaiming it both a buyers’ and sellers’ market (an obvious impossibility). Positive sub-market activity is highlighted and favourable short-term data trends extrapolated to wider themes.  Prices can be up this year, while the five year real price trend is flat or negative.
  • Private sector corporates producing commercial property reports and analysis parrot the FIRE sector narrative.  Their revenues depend on an active, preferably feverish, market. Reports simultaneously minimize market negatives and over-emphasize market positives.  Flawed research methodologies are used to reinforce existing heuristics, for instance, to allege the benefits of owning a home outweigh the benefits of renting. The private sector actively creates and reinforces urban mythology e.g. ‘Abolishing negative gearing will lead to sky-rocking rents,’ ‘FHB grants are required to address affordability.’
  • Government regulators and spokespeople are often members of the revolving door brigade switching between the corporate sector and government bodies. Cognitive and pecuniary capture leads to flawed government assessments and proclamations regarding property sector dynamics, such as the relative value of housing and the inherent stability of the financial system. Government reliance upon poorly-based property taxes causes little complaint, despite the damage they cause, meaning politicians sidestep the issue entirely or claim high housing prices are good for Australia.
  • The consensus of the investor herd reinforces the meme that property is a sure bet. Peer groups, family and social networks glorify the capture of unearned capital gains, a positively reinforcing loop of enthusiasm and blind commitment. Urban mythology is maintained through conversation pools e.g. ‘You can’t lose on bricks and mortar’, ‘They aren’t making any more land.’ Failure to buy a home is seen as a character flaw by families and peers, providing a further impetus to buy.

Unlike in the Matrix movie, a hero like ‘Neo’ is unlikely to materialize in Australian any time soon to free everyone from the FIRE-sector induced propaganda trance. The cultural zeitgeist revolves around self-interest and entitlement that has accompanied the financialization of the humble dwelling as a trading instrument.

Australians dare not swallow the better red pill of reality. It would mean acknowledging the poor personal financial judgement in paying such stellar prices and the ownership of the mountain of private debt it has left behind. So we dwell on in simulated reality, a collective rentier hopium that something comes up to save our sorry national fundament – perhaps a further round of Ponzi financing, selling the last remaining national jewels or the veritable Asian horde blind to property fundamentals? Alas, that something is more likely to be a terms of trade crisis, a fall in national income and a monumental deflation in land prices that will destroy household wealth and the razor thin capital buffers of the banking fraternity.