The Australian prime minister (Malcolm Turnbull) was interviewed on the ABC program ‘7:30’ answering questions on government policy regarding tax concessions for real estate investments. The Prime Minister spoke of the need to retain a specific tax concession because reducing the concession would reduce demand, and to reduce demand would result in lower prices. The point was put “it is basic supply and demand”. The same logic could suggest that restricting supply of housing would also be good policy, as that would also maintain, or even lift, house prices! But the key fact is that here is a national leader, committed to ensuring high, and even artificially high, cost of housing despite the resultant social problems. This raises some significant questions: what is the desired out come with respect to housing prices? Are political decisions exacerbating an international housing price bubble?
Three points are worth examining:
- So why does government policy support and even inflate housing prices, despite the social problems that may result?
- What are the resulting social problems
- The end result must be will be significant collapse in the financial system
1. So why does government policy support housing prices?
High housing prices can have negative consequence, so why have policy to keep prices at high level?
We have had around 300 years of strong population growth. That means 300 years where year on year, the demand for housing increases. That means 300 years where the land component of housing, has more valuable year on year, driven by that increasing demand. The result is that the premise ‘on average, over time, real estate values will rise’ have become a pillar of our economic structure. Our economic system has evolved around the concept that over time, on average, any original mortgage against real estate will decline as a percentage of the value of the real estate, and thus the mortgage represents a decreasing risk over time.
The above interview with a prime minister for a country where 2/3 of the population own their home. Therefore, 2/3 of voters see economic benefit from an rise in the value of homes. It then follows that a rise in the value of homes nationally, increases national wealth. Households can leverage this increased home value which injects cash into the economy creating a stronger economy.
Further, the GFC helped demonstrate the consequences when home values drop. No one wishes to repeat what has happened in some cities in the US during the GFC. It seems logical that steps to support the continuing increase home prices provide protection against a fall in home prices. This provides great scare tactics against any step the may slow or take some percentage from home prices.
So policies that ensure home prices continue to rise can enjoy strong voter support, can stimulate the economy and provide ready-made scare tactics for any alternative.
2. What are the resulting social problems?
All the points above sound so positive, just what can the negatives be?
The most obvious negative is that as home prices increase, less people can afford homes. And as rents tend to also rise as ownership prices increase, this means that not only a rise in those that cannot afford to own a home, but also a rise in the percentage of people who cannot afford anywhere to live at all.
The more homes you own, the wealthier you become in order to acquire even more homes. So the resulting trend is a concentration of wealth, and an environment that favours investors owning homes rather than the home occupant. Rich and poor divides feed social unrest.
3. The end result is significant financial collapse.
Eventually, the home ownership level will change the voter balance, and policies to reduce home prices will an election. Either this or some other factor will This can be well predicted but eventually it is an issue and prices will at some time fall.
The very population growth that has driven continual rises to current very high levels, is itself under threat. It is quite obvious to all the family sizes are much lower today than a few generations ago, and that is the subject of much more discussion in these webpages. The effect is not uniform but some locations already have seen drops in population that puts downward pressure on real estate prices. As the population plateaus, the number of place feeling this impact will grow. Small triggers such as even small economic slowdowns can than have significant impacts.
It was discussed above how price rises increase household wealth and on average result in increases in borrowings. The problem is that the rise in wealth is intangible as it is only the same houses, being declared more valuable without any real new wealth, but the loans still need repaying if the valuation ever lowers again. Sop politician fear the prices lowering again. The result is that the increase in national wealth is very intangible and the increase in national debt is very tangible. The higher level the prices reach, the greater the exposure.
How significant the impact will be will vary with levels of exposure to home loans. When the impact will be felt is largely a factor of where in the world we are discussing. High immigration levels delay the population plateau effect. However both population plateau effect and concentration of ownership of housing are trends everywhere in the long term. A significant impact is eventually unavoidable.
A Global Bubble?
Globally, the rate of population growth has dramatically slowed. Almost every country is seeing declining population growth, which will logically lead to almost every country seeing real estate slow. But slowing, or effectively halting, population growth should stall prices, no? That makes sense except in many markets, prices are inflated by the growth, which means remove the growth and there is a correction. The GFC was very much driven by one of the first impacts. Expect more.