Are you familiar with The Block?
Unless you’re from Melbourne, chances are you won’t be. I’m not talking about the long-running banal TV show, that ode to modern property-obsessed Australia that has now spawned a brattish and repugnant kid (that would be Renovation Rumble).
No, I’m talking about The Block…as in The Block Arcade in the Melbourne CBD.
I bring it up because I’m pretty sure Australia has officially lost the plot. The property obsession in this country is at a crescendo. Nearly every conversation I’ve had in recent weeks, or conversations I’ve overhead, have involved property… renovations, what a house is worth, disputes with neighbours over alterations and so on and on and on.
I pointed out at one gathering (these were people I didn’t know) that the constant talk about property in this country was kind of vulgar…didn’t we have anything else to talk about?
It seems we don’t really. Not in 2015 anyway.
On the weekend, the media was awash with it. The Weekend Australian had a bunch of articles highlighting the housing problem but most of them laid the blame at younger generations for having too high an expectation. It’s always been tough to buy property!
No one really blamed ultra low interest rates as being the main problem. Indeed, low interest rates are generally seen as the saviour in this debate because it increases ‘affordability’.
That is a rubbish argument, and I’ll explain why in a moment. But what’s this all got to do with The Block?
Well, The Block was the symbol of Australia’s greatest property madness. And the TV show The Block and it’s various offshoots are simply modern representations of our latest property obsession.
The Block Arcade in Melbourne was a monument to the great land and property boom of the 1880s. A four-story building covering Collins and Elizabeth Streets, construction took place in 1892 and 1893.
Upon completion, the arcade boasted 15 milliners, three lace shops, a photographer and the Hopetoun Tearooms, which are still there today. On most days, you’ll see a bunch of salivating shoppers staring at the windows at the amazing display of the tearoom’s cakes.
A fire that destroyed a number of properties provided the opportunity to build The Block. As detailed in the marvellous book, The Land Boomers:
‘Enormous sums were spent on buying the adjoining land at £1,500 a foot. With the expenditure of another £40,000 on construction, “The Block” and Block Arcade arose to entice and delight boom time shoppers.’
But work finished on the boom time Block Arcade just in time for the bust. Soon after, Australia’s greatest depression brought the country (and especially Victoria) to its knees.
As readers of Cycles, Trends and Forecasts will know, the severity of the bust was all because of the banks’ massive exposure to land values. In fact, nearly everyone was a land speculator at the time.
Operating businesses borrowed against their land value to speculate in the boom. After all, making money from land speculation was much easier than running a business.
In Melbourne especially, everyone was involved… politicians of all stripes, the Church and ‘upstanding’ businessmen, most of whom were corrupt.
When the boom turned to bust, land values fell below the value that the banks had lent against. The banking system quickly became insolvent. Savers lost all their money.
What was the catalyst for the bust? Prices and speculation became so fevered that as word filtered back to London, lenders started to become increasingly nervous.
Back then, as now, Australia relied on foreign capital to sustain its economic growth and living standards. But when our creditors saw their capital squandered on an increasingly crazy property boom, they pulled the pin.
The result was devastation for Australia. Thanks to the land-based banking collapse, the 1890s depression in Australia was far worse than the more well-known depression of the 1930s.
Could it happen again?
Of course it could. Although institutionally we are much better placed to deal with crises these days.
While I don’t think you’ll ever see speculation on the scale seen back in the 1880s, the widespread focus on property in this country is probably unprecedented since that time.
Given the weak state of the broader economy, juxtaposed with the feverish activity in the property market, it’s hard not to conclude that Australia is reliving a slightly toned down, modern version of the 1880s. Although instead of Melbourne as the focal point, today it is Sydney.
The constant is foreign capital. It is increasingly financing unproductive speculation in the residential property market.
The common refrain is that buying property has always been hard and youngsters these days don’t want to sacrifice inner city living to get into the property market.
There’s certainly an element of that. There always has been. But many youngsters simply see property ownership (especially in an increasing number of areas where they may have been brought up) as a pipedream. Why save for something they see as unobtainable.
According to one article I read on the weekend, in 1985 the average house cost 3.2 times the average income. In 2013-14 it was 6.5 times. Now, it would be higher than that again.
Many people like to argue that because interest rates are now so low, affordability hasn’t changed much. That is, yes house prices are more expensive, but the interest rate is much lower, so quit whinging and be happy about your towering debt burden.
But for me, the really important point here that most commentators seem to miss is that these days, it is almost a prerequisite that you need TWO incomes to get into the housing market.
If you divide the 2013-14 average house price of 6.5 times average income by two, you get 3.25 times, which is close to the 1985 average.
This tells you that our standard of living has slipped enormously over the past few decades. Not in the way measured by statisticians. They’ll tell you we are all much wealthier now than 30 years ago.
When it comes to material things, of course they are right.
But when it comes to the non-material, we are decidedly poorer. Now, families require two incomes to provide what one income previously did. As a result, many kids spend their formative years in child care centres and after school care.
I’m not sure what the long term ramifications on society will be. But given this trend has been in motion for some time, perhaps you could argue that ‘generation selfie’ is an early dividend… or the opposite of a dividend.
Don’t get me wrong here, I’m not advocating that women get back in the house and just bring up the kids. What I’m pointing out is that instead of buying us more leisure time and greater happiness, two incomes are simply a necessity to provide the most basic of society’s needs — shelter.
That we now have a property affordability crisis in this country reflects the abject failure of politicians and regulators of all stripes. This nation is awash with land!
The sooner the mainstream media start getting stuck in to our ruling class, and stop blaming kids for wanting it all now, the sooner you’ll see some genuine reform happening.
But in a world where Fairfax owns the Domain property site, and News Corp owns a chunk of realestate.com.au, genuine and deserved criticism just isn’t going to happen.
And so Australia’s economy will continue to go down the toilet. I’ll keep on saying it…you’ll only see genuine reform in this country when we have a genuine crisis. The way we’re going, it’s not far off.
For The Daily Reckoning, Australia