Australia is becoming a society divided into property speculators and exploited tenants, but it doesn’t have to be that way.

An insightful article about Australian house prices was recently published in The Conversation. Unlike many other articles and political speeches, this article did not suggest that Australia’s high and extended growth in house prices is caused by a shortage of houses:

It’s tempting to think home prices are soaring because there aren’t enough homes.
But that can’t explain the sudden takeoff from about the year 2000, the sudden takeoff from about 2013, and again now – against expectations – the stratospheric takeoff in the wake of the COVID recession.
Broadly, we’ve enough homes. The 2016 census found we had 12% more dwellings than households, up from 10% in 2001.
That’s 12% of our houses and apartments empty – used as holiday homes and second homes, or waiting for tenants.
If there really weren’t enough homes for people who wanted them, it would be more than property prices soaring; it would be rents.
Instead, overall rents have been barely moving – growing even more slowly than wages – for half a decade.

Peter Martin in The Conversation

Martin goes on to suggest that the force driving up house prices is the drive to invest in property that can then be rented out. More Australians than ever before have become landlords (about 2 million of our 25 million people, apparently). Competition among property investors is driving up house prices, which increasingly cannot be afforded by young people, who then continue to be home renters.

The proportion of home renters is rising, and the fact that rents are not rising in response is another indicator that more and more of our housing stock is now being placed on the rental market. For property investors, the big buzz is not the rent that can be earned by property — a rental return after expenses of 2% a year is typical, and compares poorly with (for example) the dividends paid by most Australian share investments. The hoped-for gain from property is a capital gain, and this is enhanced by features of the Australian taxation system. The tax system supports ‘negative gearing’, which means that expenses of owning an investment property can be written off against income, including income from other sources — property investors quite rightly feel that the tax office is lending them a hand with their investment. The tax system also taxes most capital gains at half the rate that would generally apply to a person’s income.

These tax breaks apply to most forms of investment, so why is residential property the preferred investment for most Australians who have money to invest? Most of these investors are amateurs — they have day-jobs that fill their time and occupy their minds. They may be inexperienced in financial management or financial investing. They often see stocks, bonds and managed funds as untrustworthy ‘bits of paper’. They prefer property because they see it as a simple and tangible investment. After some decades of observing relentless house price rises they say and believe ‘you can’t go wrong with bricks and mortar’.

In saying this, they are ignoring counter-examples like the dismal performance of Australian house prices between 1929 and 1959, or of American house prices from 2008 to now. They are ignoring the illiquidity of property investment, which means that you must buy and sell in large lumps (whole properties), cannot buy and sell quickly (it takes weeks if not months to complete a transaction), and cannot easily release a part of your investment. Illiquidity can even seem like a virtue for investors who lack the time or the expertise to continually reconsider the choices that are open to them. Property investing is not exactly ‘set and forget’, because property needs active management and maintenance, but once the big purchasing decision is made, the other decisions that necessarily follow can become a pleasant hobby. What colour to paint the living room? How long can we postpone repairing the roof?

In Australia today, buying houses and apartments to rent them out is the blue ribbon simpleminded investment of choice. Just buy the house or flat — don’t build anything new. Do even less maintenance that you would do on your own home — the hapless tenants can take it or leave it. Rely on your position in the market to guarantee you your capital gain. Just wait, and watch the greed of others drive your property up in value.

If this didn’t hurt anybody else, it would be a great way to make money. Unfortunately, it does hurt other people. Owning our own homes is a lovely thing: it gives us security, it enhances our sense of autonomy and self-worth, and it is the best way to ensure that homes are properly maintained, which is good for the community. Home ownership is a big contributor to social stability and individual happiness. Unfortunately, the booming disease of property speculation is driving an increasing proportion of young people out of the home market and making them slaves to the miserable tenancy system that is renting in Australia today. (Our rental market is not like renting in Europe — it is far more expensive, with less emphasis on tenant rights and much less security for renters.) As Martin points out in his article, we used to have 71% of Australians owning their own homes, and now its down to 63% among those aged 35 to 44 — and still falling. Young people in their twenties are increasingly bitter about what they see as exploitation of their labour and a system that does not promise them an improving future. To them, it looks like wages are not growing, property prices accelerate further away from affordability, and some old farts protected by the government are living large by charging high rents for crappy houses and flats.

We are storing up some terrible social disharmony for the future by allowing this sort of inequality of opportunity between generations. It’s not really an answer to say that the old farts will eventually die and leave their wealth to the young ones: by the time that happens, the young will have become old, they will have learned the bitter lesson, and they will exploit the new young in their turn.

Apart from this intergenerational disharmony, we should also consider the effect on our economy when such a large proportion of our national investment capital is tied up in existing housing stock that is trading at inflated prices. The economy would be better served if housing traded at lower prices and Australians invested more of their wealth in industry and the creation of new goods and services. If the bourgeoisie could think of some less passive way of growing their wealth, the economy would be more lively and robust. Imagine if all these passive property investors turned instead to building new houses, or building businesses, or even if they simply invested their money with people who did build businesses. Property speculation is not really wealth-creating. It uses capital that could be employed in more productive areas of the economy, and is therefore, considered globally, actually wealth-destroying.

There is a great deal of nonsense talked about our housing market. People talk in one moment about the importance of getting house prices down, and in the next moment about what a threat to economic security it would be if house prices went down. The reality is that in the short term what is good for the ‘haves’ cannot be good for the ‘have-nots’, and vice versa. Oh, for the day when our public discourse decides whose side we should be on. (Hint for the morally-challenged: we should be on the side of the have-nots). But if we consider it in the longer term, reducing property speculation is good for everybody.

Governments talk about the importance of helping young homebuyers into the market, without offering anything remotely approaching a solution to the problem. The usual gesture is to offer some minor concession to first homebuyers, such as a grant, although the main impact of such measures is to increase the upward pressure on prices.

Let’s be clear about this: the main solution to runaway property prices is to discourage people investing in property other than their own home unless their investment adds to the stock of housing.

The chief reform that would achieve this result would be to remove tax incentives from buying existing housing. Negative gearing should not be available to investors who are buying existing property, only to those who are adding to the stock of housing. This reform should not be ‘grandfathered’ (ie, only applied to new investments), but the intention to introduce the reform should be signalled a year or more in advance. If this was done, the trajectory of property prices would begin to alter immediately, as investors began to reposition themselves into other investments.

It would help if this reform was accompanied by the removal of stamp duty (a high tax on property transactions) to be replaced by property tax (a low tax on the the value of property). Property tax is more equitable in taxing all people who benefit from property ownership. It creates a small disincentive to owning property that exceeds your needs, or that is not profitable to own. Removing stamp duty removes a disincentive to make rational exchanges in the property market. Taken together, these reforms would be a small step towards improving the liquidity of the property market.

It might further help if the government conducted some public education campaigns to promote investment in things other than property. Share market investing is actually not particularly difficult or dangerous — in the long term, returns on the share market are as good  or better than property investments.[1] A range of investments, both on and off the share market, are more socially useful than property speculation, but people need the knowledge to enter into these sorts of investment. The legal framework to prevent fraudulent or exploitative financial practices is obviously important.

There are (always) a multitude of other things that might be done to address housing inequality — although arguably all the first home owner grants and subsidies are not making a meaningful difference and could be removed. We could take even stronger measures to prevent people who don’t live in Australia from buying property in Australia — but ‘cashed-up foreigners’ aren’t really the problem[2] Governments could certainly invest more money in public housing, which would make a huge difference in the quality of life of the people least able to afford their own homes, without touching the issue that is hurting most young people. Considering people who rent, there are various reforms that might improve their conditions — although laws that improve conditions might tend to raise rents and laws that limit rents usually tend to reduce conditions, so that engineering an overall improvement can be difficult. In some parts of Australia, the reform most likely to help renters would be to restrict the availabilty of short-term rental (think AirBnB), forcing property owners to offer longer-term tenancies. Overseas, but not here, there have been reforms to remove tax deductions on under-utilised property or even to establish ‘use it or lose it’ rules on property — such reforms discourage speculators from holding empty property, and can improve the availability of housing for rent.   

However, many reforms do not go the core of the Australian problem. A change to the taxation rules around property speculation would be simple and send a clear signal to investors, precipitating a rapid change in behaviour. House and apartment prices would fall as investors exited their speculative property investments. Some wealth would be destroyed in this process. The haves would have less, but the have-nots would get an opportunity. Many renters would become home owners. The future growth of property prices would be lower, more in line with the real demand for housing. The future growth of investment in Australia would be directed into more productive channels, generating more wealth than would otherwise have been the case. This is a win–win proposition. We’re becoming a society divided into property speculators and exploited tenants, but it doesn’t have to be that way.

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© 2021 Craig Bingham

[1]     I am making this assertion based on the hundred year average. The last twenty years has property marginally more profitable than shares. Type ‘property vs shares Australia’ into a search engine, and you will find plenty of diverse opinion, some of it biased or inaccurate.

[2]     See https://www.rba.gov.au/publications/bulletin/2014/jun/pdf/bu-0614-2.pdf. This report was written in 2014, when foreign investment in residential property was seen to be at higher levels than it is now.