Land windfalls provide wealth illusion
As published on The Drum.
Our houses can’t make us all rich
While a recent report might suggest Aussies are the richest people in the world because of high house prices, the reality is the true beneficiaries of this boom are banks and lenders, writes Warwick Smith.
The latest Global Wealth Report, released by Credit Suisse last week, indicates that Australians are the richest people in the world (based on median wealth). The biggest contributor to our wealth is house prices. This news has been enthusiastically embraced by economists and journalists alike.
Even the usually sensible Saul Eslake, of Bank of America Merrill Lynch, seems to indicate this is a good sign, saying “rising house prices tend to reduce inequality, as they make up a greater part of middle class wealth”.
This is a little bit like saying that because the market price of a human heart has gone up we’re all now rich. Increases in house prices are only really beneficial to those who own more than one house. If you only own one house, like you only own one heart, the circumstances in which you can really benefit from price increases are rare.
Owner occupiers might be wealthy on paper but it means virtually nothing to their wellbeing or even material prosperity. For those who don’t own a house but would like to, increases in prices are, at best, disheartening.
The very high median house prices in Australia are driven largely by capital city prices, particularly in Melbourne and Sydney. Many young people in these cities have given up the dream of owning their own home because the only way it’s vaguely possible is if they live in far outer suburbs with few services and hours of commuting. Young families who do manage to purchase a home (rarely can it be done on a single income) are often forced to work more than they would like, leaving kids in childcare and after school care when they would rather be spending time with them.
The true beneficiaries of ever increasing real estate prices are the banks and other lenders. Most Australians spend a very significant proportion of their incomes paying interest to the banks, either directly on their own mortgages or indirectly via their landlords. The higher house prices go, the more income is captured by the banks. Saddling our young people with a lifetime of debt is not a cause for celebration, it’s a problem to tackle
Current government policy actively props up real estate prices by making housing investment artificially attractive. Negative gearing and the concessional treatment of capital gains (individuals pay tax on only half of the money they make from capital gains) distorts the investment market and makes speculating on land prices a very attractive investment option. Public policy should be doing the opposite. We should be directing investment into productive economic activity, not into asset price speculation. Housing construction is productive activity, speculating on the price of existing housing stock is not.
From an economist’s point of view, there are plenty of options for tackling housing affordability that would also strengthen the Australian economy and reduce the likelihood of bubbles and recessions. These include abolishing negative gearing and the concessional treatment of capital gains and increased use of land taxes.
Accumulating wealth through increased house prices is not progress and it’s not prosperity. Wealth that is gained through rising land prices is what economists call economic rent; it’s unearned income. Landowners do nothing to cause land price increases, which are actually a result of community and government action. As a result, the income should belong to the community.
From a politician’s point of view things are not so simple. Any politician who even suggests meaningful measures to tackle housing affordability will be attacked by those with a vested interest in ongoing real estate speculation. The banks are at the top of that list as well as being at the top of the list of corporate donors to the Liberal party. However, the banks are far from being the only obstacle. There are also the million or so individuals in Australia with investment properties. Grandfathering of current provisions plus incremental shifts in tax arrangements spread over many years (as the ACT is doing) can overcome some of these problems but significant political will would still be required.
As a nation we can do a lot better than funnelling our wealth and aspirations into never-ending growth in house prices. Despite this, doing something meaningful about housing affordability is not on the political agenda of Labor or the Coalition because there is no bottom up pressure on them to act and plenty of top down pressure not to.
While most media outlets continue to unquestioningly report price increases in a positive light there is little chance of this changing.