The De-financialisation of the Housing Market


–Yesterday’s reckoning left off with the idea that the best strategy for dealing with a dangerous global financial system is to de-financialise your life now. In the essay below from Neville Kennard, via, this idea is applied to housing. It’s sure to please the housing bulls.

–Outside the housing market, the ‘definancialisation’ of your life is going to be driven by a demographic trend too: the ageing of the Western Baby Boomers. A young society, where the largest portion of the population is earning a good wage (or two, if it’s a married couple) is going to be driven by consumption. Throw in easy access to revolving credit and home equity lines of credit, and the seeds are planted for economic growth driven by spending.

–This is one way of explaining the bull market between 1982-2000. It was driven by the financial coming-of-age and generational optimism of the Baby Boomers. They spent, driving up corporate profits. And they harvested some of those profits back through ownership of mutual funds and shares.

–But what happens when the people who spent when they were thirty begin saving as they approach sixty and seventy? Will the aggregate earnings of business (and the economy) go down as the Boomers shift into a retirement frame of mind? After all, a lot of production has been off-shored in the last 30 years.

–If private consumption contributes less to GDP growth as the Boomers age, what will replace it? Business inevstments? Government spending? Or will the composition of corporate earnings not decline at all? Will it just change (by sector) without the aggregate amount going down?

–For example, an ageing Boomer couple might spend more money on health care and nutrition (bed pans and vitamins) and less on leisure (Harley Davidson motorcycles and gym memberships). The economy doesn’t have to get smaller as people get older. But it might look and feel a bit greyer.

–In any case, ou would guess this shifting pattern of consumption, driven by demographics, might have an effect on corporate earnings in Australia. Not that Australia is as old as say, Japan. Take a look at the two population pyramids below, via the U.S. Department of the Census.

–The Australian pyramid is actually pretty evenly distributed, with the Baby Boomers making up a large portion of the workforce (and driving patterns of consumption with their high level of discretionary income). But the Gen Xers and the Gen Y kids aren’t far behind in numbers. And if their wage levels are lower, they always have access to credit, and aren’t afraid to use it.

Population Chart 1

Source: U.S. Census Bureau

–Japan, as you can see below, is a much older society. This may explain why Japan’s domestic price level remains flat: people are spending less, saving more, and spending differently. This explains how Japan has been able to fund the world’s largest public sector debt-to-GDP ratio. The older and retired members of Japan’s workforce are investing conservatively in government bonds, rather than the share market.

–And to the extent that Japan’s biggest companies are exporters, their earnings may not be as damaged by the clear demographic trends as you first think. This could be true for Australia too. The big export earners are the commodity producers. And the demand that’s driven higher commodity prices isn’t coming from Australian businesses or consumers at all. It’s coming from China, India, Korea, Indonesia and others.

Population Chart 1

Source: U.S. Census Bureau

–The one industry that could be most impacted by the ageing of the Baby Boomers is banking. Not only are Australia’s banks affected by the rising global interest rates and the higher global price of money, but to maintain earnings growth they have to somehow finance the transfer in ownership of Australia’s housing stock from one generation to the next. That should be a neat trick.

–It’s possible that one of the casualties of the Global Financial Crisis will be the idea of treating a house as an asset to speculate on. That’s probably an un-Australian thing to say. But as we are not Australian, we’ll go ahead and say it anyway. Better yet, we’ll let a real Australian make the case for us…

Your Home is Not an Investment

By Neville Kennard

Contributing editor,

One of the underlying causes of the Global Financial Crisis was a government-induced over-investment in houses and property. Governments found it to be politically convenient to make special concessions and incentives to people to own their own home. In the USA, for example, home interest-payments have been tax-deductible. In Australia a home has been Capital-Gains Tax Free. Many countries have relaxed-lending criteria for home-ownership leading to people spending and borrowing more than is prudent on their home.

All this has lead to an over-investment in houses. On top of this the house-market in many places has been buoyant, leading people to think they have made a “good investment” in their home.

For many people their home, the house or apartment they live in, is the single biggest purchase they make in their life. People tend to keep their home for a long period, sometimes changing and moving as needs and wants change. Quite often the value of their home increases over their life or ownership period. This is often due to inflation, where it just seems to increase in value, but doesn’t in real terms. Sometimes supply and demand pushes the price up, or down. Actually it is mostly the land on which the house sits that increases in price or value; the house itself mostly depreciates with age and declines in value.

With the house we live in we mostly have a loan to finance it and we pay it off over a longish period. It is a means of saving – a forced or disciplined saving regime for us. So after ten or fifteen or twenty years our house may be paid off, and when we choose to cash in and sell, it gives a nice lump sum, probably tax-free, that has kept up with inflation, and we can take our nest-egg and perhaps buy something less expensive, with something leftover to invest or play with.

Thus it seems like it has been a “good investment”. But the Global Financial Crisis has caused the house mal-investment chickens to come home to roost and house prices are dropping in many places.

There is another side to home ownership which puts the purchase of a house in a different light.

A house/home is really a “long-term consumer-durable”; it is like a refrigerator or appliance. It will last twenty years or more years and serve us well. It will have running costs, such as rates and taxes, maintenance. It will need to have leaks fixed, plumbing maintained, paint and various repairs over its life. It will depreciate; it will get old and out of date.

And a home will not give a financial return over its life; it will cost quite a lot to own. The land under the house may go up (or down) with supply and demand, but a vacant block of ground will not give a return; rather it will cost money to keep.

Now this is not to say that one should not buy and own a house to live in. Quite the opposite, owning your own home is an attractive and desirable thing to do and most people do it. It can be shelter and accommodation; it can be a source of self-expression with decorating and furnishing. You can alter and change and expand your home when you need or want to. And it is “home”. It is more of a “home” when you own it rather than rent it. And there is a sense of pride and satisfaction and security in “owning your own home”.

But it is still not a Financial Investment. If you rented your home instead of buying it and put the money into a business or the stock market or even an income-producing property you would most likely come out well ahead.

The property market has swings. Prices go up and down. Should you be skilful or lucky enough to buy when prices are low, and then sell when they are high, it will look like a good investment. But this then turns it into a speculation. And mostly we buy a house when we want or need to, and sell when we want or need to. There are often other factors at play that push us into buying and selling our home – family, job or just because it’s what we want to do.

Look upon your home as a long-term-consumer-durable. Own it, pay it off, make it the way you want it, move and swap when you want or need to, and look for other things for your Financial Investments. Look for investments that will hold their value or increase in value (in real terms) and give a return. A business, shares, investment property may do this. Enjoy your home, and if it does actually give you a financial return when you sell it, look upon that as a bonus.

Over-investment in housing and home-ownership has meant less investment is available for business-investment and more productive uses, Let’s hope the home-ownership binge is behind us. Politicians can’t be trusted to make good investment-incentive rules, so we must each think for ourselves and choose what is in our individual long term interest.

Neville Kennard is a contributing editor to

Dan Denning,
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Richard from Balwyn
Richard from Balwyn
5 years 9 months ago

If we have over-invested in housing and home ownership (no hyphen required), why is there a housing shortage?

Nathan Chattaway
Nathan Chattaway
5 years 9 months ago
Richard, Define shortage. 60 years ago the average Australian house was 120 sqm and had six people living in it. Today the average Australian house is 250sqm and has less than 4 people living in it. Divorce is much more prevalent today, and broken families often move into two dwellings. The number of people living alone is higher than ever. Why? Would it not be better to try and shift our culture of excess consumption back to something more austere where private space was less valued? Our mental health issues and childcare costs would probably decrease too! Fill up all… Read more »
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