Have you heard of the new scheme to solve the Australian housing affordability problem? After we read the articles about it this morning we couldn't help of Kim Jong-Il's line in Team America: Why is everyone so ****ing stupid?
"A national incentive scheme involving tax credits, cash payments, stamp duty concessions, bond issues, and other benefits has been proposed as a way of encouraging private sector investment in more than 10,000 new homes a year for low and middle-income households," reports Mark Phillips in today's Australian Financial Review.
So new and serious is this problem that new terms are being invented to describe it. "Housing stress," is one of them. You also have "mortgage stress" and "rental stress." Soon to come, post-traumatic, subprime stress.
These terms loosely indicate, we suppose, the financial and personal anxiety that come when you have to spend close to 30% of your income on rent or mortgage payments, as if it were a grave medical condition.
Oops. Did we say "have to spend?" Our mistake.
Does a man have to spend a certain percentage of his income on rent or mortgage? Does Liz Taylor have to wear diamonds? Does Donald Trump have to wear an absurd comb over? Do we really have to refer to ourselves as we?
Not so far as we can tell. Some decisions are pure expressions of vanity. People go long pride and short common sense. Such is the case in the Australian housing market. What we have here with this housing scheme is a boneheaded solution to a fictional housing affordability problem.
Don't get us wrong. There are definitely some houses that are not affordable to a lot of new and first-time buyers. Having just spent the last few days throwing elbows while competing for a rental property, we can attest to the fierce competition for certain rental properties. There are lots of people who want to live on quiet, tree-lined streets, not far from the beach or the CBD. No surprise there.
What we can't figure out is how building 15,000 new units a year will solve the problem of everyone wanting to live in the same nice neighborhoods. It's not that there is a shortage of housing supply. It's that everyone wants to live in the same places. And lest we checked with the laws of physics and social propriety, this was neither possible nor acceptable.
Is there a shortage of homes with roofs for Australians to count sheep in at night. Obviously not, or else people would be living in the public parks with only the blue sky for a roof. It's not that there isn't enough housing. It's that the housing everyone wants has gone way up in price because of low interest rates.
A grab-bag of incentives won't solve this problem. The real problem is the inflated expectation that everyone can own a $350,000 home with a backyard, near the coast, but with plenty of privacy and room for a garage. That isn't so much an expectation as it is a financial fantasy that's run headlong into geographic, demographic, and financial reality.
Have you ever heard of the fictional Lake Wobegon made popular by American author Garrison Keilor? In Lake Wobegon, "all the children are above average." That of course, is not popular. But that is really the goal of the new housing scheme, to make everyone, regardless of age or financial circumstances, "above average" in housing terms. But maybe it's just not possible for everyone to have the same dream at the same time. We know, it goes against the whole spirit of the age to suggest that you can't always get what you want. But maybe the Stones were right.
It will not be popular, but our suggestion to the housing crisis is that Australians downsize their expectations to come more into line with reality. Our father once put it to us another way, when we were 15 and complained that we couldn't stay out late with car keys like our older brothers. "That's because you're not an adult yet, and you can't drive," he said. "When you grow up to be an adult, you'll be able to do grown up adult things."
The problem today is that we are all encouraged to be financial adolescents, to believe that you can have something for nothing, that you don't have to delay gratification and save for a rainy day, and that if you want something you can't really afford, you "owe it yourself" to buy it on credit. This is childish behaviour, and appealing to Big Brother or the Nanny State to fix it for you is a childish reaction.
We would love to have a house in the beach too, but wishing doesn't make it so, and neither will more credit, more incentives, or new laws. In a nation of growing cities not everyone can live in the CBD in low-priced house. It doesn't matter what kind of well-intentioned but naïve egalitarian fantasy you subscribe too. Besides, why should tax-payers subsidize builders to provide homes for renters who can't afford homes? We would like to live in Jim Roger's old, umpteen-million dollar apartment in Manhattan, but we don't see any subsidies lying around for that, nor would we expect to.
No matter how we twist and turn the subject-slash stamp duty, give more tax credits, increase the grant size for first-time buyers, incentive builders-it all comes down to the same thing: a subsidy with the goal of putting everyone in a nice house in a nice neighborhood all at once, which of course, is utter nonsense.
What plans like this fail to recognize is income mobility over time. Really valuable goals usually take time to achieve, especially with money. Your financial situation changes over time, and so do your means and ambitions. When you use your brain to think about it of course it makes sense that a first-time home-buyer in his early twenties can't afford a property in one the most desirable and fastest growing cities in the world.
Is there any cosmic injustice in that? Or is that just the way it is and has always been? Do we really need a comprehensive policy to alleviate this inequality? Can't somebody do something about all the problems?
No.
Nice places to live, unlike personal incomes, can't be automatically redistributed by government confiscation, at least not yet. Over time, a young man starting his career will begin to earn more. He might even save some money. Then, later, as his skills and experience accumulate, so will his savings. And then, a little later in life, he'll have the capital, and probably the desire, for a more permanent roof over his head. He'll be a decent credit risk. He'll get a mortgage. And maybe he'll buy a house.
The solution to the Australian housing affordability crisis (in addition to downsizing your expectations) is two fold: save more money and make more money over time is the first solution. The second is for well-intentioned morons to quit throwing more money into the mix to drive house prices up. They are already too expensive. An increase in the supply of money and credit is what's made housing so unaffordable, not any real shortage of places to hang your hat at night.
That is how the whole situation works itself out in the fantasy of Daily Reckoning land. But these days, we are taught to believe and expect that if you want something, you ought to be able to have it right away, with no money down. And if you can't get it, the government should do something about right away.
Another name for redressing the injustice of not getting exactly what you want exactly when you want it is "Democracy," whereby you can make other people pay for what you want through majority rule. The Howard government made a stupid promise when it said it would keep interest rates low, seeing as how the Reserve Bank, and not the government, controls interest rates. And now, the mis-guided public will probably make similarly stupid mistake and approve of a scheme which does nothing to solve the problem.
And we're not having a go at Australia, here. As we've said, we love the place. But stupid politicians and bad monetary policy seem to know no bounds. And for the record, this central bank, compared to the Federal Reserve in our homeland, is remarkably prudent and responsible. That won't solve the Australian housing affordability problem. But neither will this latest hair-brained scheme. What we really need is a good old fashioned mean-reverting crash. Those are never welcome by anyone. But they still happen anyway.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by sean on 21 March 2007:
Here are some other dangerous ideas generated by the white shoe brigade lately.
Young people should be allowed to access their superannuation to help them into homeownership. That is, to keep the "chain letter" of rising/stabilising house prices going can we, the babyboom generation legally rob the next generations?
Only 7% of Generation Y will ever be able to afford their own homes-this from a real estate think tank (stink tank). Yea? And who pray tell will the existing home owners sell vastly overpriced homes to, when 93% will not be attending the party?
The recent run up in prices has as much to do with tax minimisation/avoidance as the availability of cheap credit. The real estate Ponzi boys have lately been targeting high earning tradespeople with the lure of negative gearing.
Comment by MG on 22 March 2007:
Dear Mr. D. Denning,
What gives?
This whole housing bubble and the impending bailout is pure unadultered bullpuckey.
It represents the zenith of central banking. The grand masterpiece of deceit to rob the middleclass for the remaining life of our fiat money system.
Ben Bernanke, the well manicured bearded mofo, with his ivy league sweater vest, will concoct the ultimate bailout that will send us all to the poor house to save the swindling bankers.
The sooner it falls apart the better.
As money supply increases towards infinite, its value decreases towards zero.
What a bunch of steamy loaf bullpuckey!
Comment by kage on 22 March 2007:
Actually negative gearing doesn't work so well since the government adjusted for bracket creep, and dropped effective tax rates into the bargain. People continue to think negative gearing is terrific because a whole generation of investors did quite well out of it. (witness the slow down in investment demand for housing). Only the top bracket people would find it useful now, and they can't build enough houses. Talk of tax credits is just code for extending negative gearing again. I agree that the market will 'adjust'. Sooner or later there will be retirement and funeral booms to match the baby boom. Consequent impacts on housing and the super (sharemarket) will follow.
Comment by Brad (25) on 12 January 2008:
I've been thinking about this recently and remembered this article. It's frustrating to see the way the government is using (wasting) our money on placating the growing demographic herd of home-owning-aspirants.
First year economics teaches us that if you put additional purchasing power in the hands of buyers you will see an increase in prices.
It's a shame that our governments can do some things right (like the gimicky-titled, over-publicised "future fund") but slip up in other such fundamental ways.
Let's hope Kevin Rudd can prove that he is worthy of a fiscal "anything" description let alone conservative.
Comment by Paul Reynolds on 16 January 2008:
Theres a great book called rich dad/poor dad, where the basic premis is rich people dont own property (nor anything else) as its a liability unless it makes money..... kinda like a boat, which is refered to a hole in the water. lotsa holes in the land now it seems too. I have a funny yet pleasing vision of people living on the streets depression style and not a power pole without a real estate agent swinging gently in the breeze.
Comment by Gazza on 1 February 2008:
Kage absolutely well said. Australia is expecting a rapidly increasing ageing population. Well once that wave hits as those people cant live forever. There is certain to be a Housing Demand slump and Sharemarket/Superannuation slump
Clever place to be is not to have too much debt hanging over your head when it all turns to shit creek.
Comment by Comncents on 6 February 2008:
The solution to the problem of everyone wanting to live on a leafy quiet street is to have more leafy quiet streets and fewer ruddy great 8-lane roads choked full of filthy traffic.
And as for everyone wanting to live by the beach, here's an idea - instead of spending billions propping up prices how about just creating a few beachparks which, instead of going along the beach, go inland perpendicular to the beach. All vehicular traffic either goes under or is dead-ended. That way more people can live by the beach without actually living by the beach. Pure genius.
Comment by Forever renter on 27 February 2008:
This article is intensly angering. People with degrees who've worked hard and are now in their 30's are not currently able to buy ANYTHING - 90% of my friends are like this, and the only way out, if it's available to you, is to live rent free with parents for years to save a deposit.
I can't wait until all the baby boomers want to sell out of their over-inflated houses and can't find buyers (i.e. me and my generation).
How can you say that houseing isn't necessary? Am I supposed to sleep in the park and wash in puddles? I don't think I'd keep my job for long, nor any of the few belongings I have.
Add to this the fact that men are paid almost double in many cases for the same work, and you have a generation of women who are 'over it' and unable to own their own studio flat.
If Mr Denning didn't have many benefits in life including a degree and houseing paid for by his parents I would be very surprised. The majority of us who don't have these options hate people like you in your nice houses with nice back yards and pets.
Comment by Live Free or... on 28 February 2008:
"This article is intensly angering.... and the only way out, if it’s available to you, is to live rent free with parents for years to save a deposit."
Seneca pointed out that anger is often driven by unreasonable optimism. Another way of putting it is the inability to adapt to the realities that currently exist, instead of expecting things to always be as good or better as they were before, and making whatever changes in viewpoint/lifestyle are necessary.
I live with my (now retired) parents still, at 29 years old, and voluntarily pay rent. My relationship with my immediate family, as well as my fiance's, has never been better since I took less notice of what a "normal" lifestyle and economics/social progression looked like. It helps that I am Chinese, and we never really let go of our family and local relationship-centric cultural perspectives. I don't intend to stay here forever, but I don't know what shape my family will take in the next few decades, and do hope my parents can play a major part in bringing up my kids.
Comment by Live Free or... on 28 February 2008:
PS. I hope that didn't sound too pompous... that wasn't my intention. What I am trying to say is that the world always changes, and maybe the forces of the West's declining productivity and increasing government intervention in the economic sphere will push us into changing certain assumptions we hold about what it takes to have a happy fulfilling life, and that this is not all bad.
It's funny, in that economic "Left"-ist policies are the ones preventing us from deeply and genuinely reassessing our values and consumerism/materialism.
Comment by trueplaya on 28 February 2008:
I really don't see why the banks are being blamed in all this... they are only doing what they are designed to do, i.e. make money. it is the american middle class and american government that are to blame. perhaps the biggest cause of this credit crunch/recession is the presidency of mr. bush, who essentially suceeded in making the rich richer and hence oblivious and careless, while decimating the middle class with taxes to pay for the wars. of course, the middle class, seeing their bosses sport nice cars and fancy houses, wanted a piece of luxury, and the sleazy mortgage men were there to provide it with severely damaging (yet concealed) ARM packages. while one may very well blame the mortgage man, it was the american people who signed the contract, thinking it was their right as americans to own a house. WRONG! ownership is a privilege, not a right, and must be earned through hard work or a sucking up to generous daddy. americans must run into this reality check: that the government no longer cares for the welfare of its peoples, but rather for the strength of economies. i am sad to say, but the middle-class had been raped for the sake of a few CEO's tax break on their bonus checks (which usually average $70 mil). so it was probably a big tax break, and he/she probably bought a nice new yacht with it, but the average US family will find itself looking for street alleys to sleep in every night.
Comment by christina on 29 February 2008:
Forever renter has the number one trait of all losers "they BLAME others for their station in life" How about getting off your bum, reading some business and internet and marketing and ebay books and websites, and then starting your own business, instead of whinging about others. But then again if youve decided to actually call yourself forever renter, then it looks like youve already decided on your own fate. Successful people spend countless years studying in the real life "university of hard knocks" and just because they dont have alphabet soup letters aftert their name on a degree doesnt meann that they wokred any less than you did to get to their current stations in life. People like you tend to convemiently forget the years of hard slog that entrepeneurs went throough in their early years while yo guys were ating pizza and drinking beer. Get over yourself and stop blaming others for your life. THe beuaty of it all is that it doesnt matter what you say about Mr Denning- it wont make him poor and you rich just because you said so