No Way Back, No Way Forward
What does "Rich" mean to you?
Would you rather be "Wealthy" (High Net Worth) with a low to modest income,
or have a "High Income" job and career but without high value assets.
You need to choose between the two: money to live well now, or possibly rivers of gold when you sell.
The Residential Property Market in Australia, especially in the six state capitals, sits at, or near, all-time highs in the ratio of Median Price vs Average Income, far in excess of the World Bank / Demographia "severely unaffordable" ratio of 5 [image below]. Especially troubling as real wages have been stagnant since at least the 2008, the Global Financial Crisis (GFC).
How & why have buyers bid up prices?
We're told this isn't a problem because "homes have never been so affordable", as mortgage interest rates are at an all time low, so current repayments are low compared to household income. This ignores the "deposit savings gap" - house prices increases push up minimum deposits faster than 'nuclear family' households can save and have done so for 10-15 years, creating a generation where all but a few are locked out of the housing market.
This is a problem:
When, not if, interest rates increase, even revert to the long-run average about 7%, mortgages will become unaffordable to the majority of people now aged under 45.
"Housing stress", the affordability of mortgages or rent, has been an issue of concern for the Parliament of Australia for some time. From the 2016 report:
The high cost of housing in Australia has been at the forefront of a range of recent policy debates concerning Australia’s taxation arrangements.
This brief examines housing affordability in Australia for both owners and renters over recent decades.
It focuses particularly on those households which are most affected by high housing costs—those on low incomes in the private rental market.
Rents increase in-line with current house prices, rising faster than (now stagnant) wages, compounding the effect of the "deposit savings gap". Not only are younger people suffering rental stress, to the point there are no rental properties affordable for Centrelink benefit recipients in the Capital Cities, but they can never buy their own house, without inheriting it or getting help with a deposit - technically illegal.
Millennials, born 1981 - 1996, are hitting 40, still with education debt, most with no savings and living with the prospect of being "lifetime renters", some have found full time jobs, but most have been "casualised" into low-paying service industry roles with no career prospects.
Uncharacteristically, increasing numbers of University educated "Professional" couples cannot afford houses, even in regional areas, traditionally more affordable.
Unsurprisingly, fertility rates are in decline. Women, looking at a bleak financial future, choose to have fewer, or no, babies.
How did we get here?
This is the direct legacy of John Howard, perceived by many as our "Best PM", despite a shocking record of economic mismanagement and waste. The windfall income from the Mining Building Boom wasn't just wasted, but became the source of a structural deficit to be paid by younger generations. A senior economist describes it as "temporary boom, permanent promises".
In 2013 the IMF published a report on "Prudence & Profligacy", tagging Australia under Howard to be our most Profligate government, twice. 2003 and 2005-2007. Government spending, as a percentage of GDP, was the highest on record, while there was no great investments, infrastructure built or Sovereign Wealth fund created. A more nuanced view of Howard's Profligacy.
Howard consciously and deliberately created the policies that have led to both stagnant real wages, especially for the younger and lower paid with his changes to Industrial Relations & wage fixing, and the dramatic run up ("Boom" or "Bubble") in the Residential Property market over the last 25 years.
Howard significantly changed Keatings' Capital Gains Tax. He abandoned CPI indexing and introduced a "50% discount" on the CGT. This turbo-charged "Negative Gearing" and was amplified by many shysters spruiking "Get Rich Quick" schemes via Real Estate. The first fall-out was in 2008 after the GFC.
Money gained by buying and selling an asset in only 2-3 years, was taxed at half the rate of wages income under Howards' CGT change. This, along with declining low interest rates, lax lending processes and a wide-open money supply (managed by the RBA) fuelled the longest running Residential Real Estate Boom in Australia.
Property Booms - followed by inevitable Busts - have a long and "proud" tradition in Australia. Why would any politician encourage one, let alone create structural changes to fuel the most savage, widespread Boom / Bust Bubble in our history?
The Residential Property Market creates jobs during building and little on-going tangible economic benefit. There is little or no Intrinsic Value in a "box made of ticky-tacky, all looking the same" plonked in an undesirable, remote, under-serviced Western Suburb of any Capital City. Unlike agricultural land, Commercial Office Space and Industrial Parks, where productive economic activity is generated from use of the property.
The only value such a property can provide is rental income, which relies on high demand and willing renters. If anything happens to the economy, the ability of these properties to produce any income becomes zero. They only have value-in-use as residences in undesirable locations - a last resort option.
Who raised the prices of Residential Property over the last 25 years?
"The Market" has bid up prices: the same people who work, vote and participate in our economy.
It's not been "Investors" alone, nor has it been "Aspirationals", Asian Investors or Immigrants responsible for driving up housing prices, creating the most severely over-priced market ever seen in Australia.
Everyone who's bought a house, got a mortgage and paid the "going rate" has together created the current disaster.
The worst financial outcome has been the enormous systemic risk that's been created. All the "boosters" who claim "real estate is the source of all wealth" are living with their head in the ground. Housing is a necessity and Residential Real Estate is a long-term game.
Australians have, collectively, placed "all their eggs in one basket", betting everything they have now and will earn over the next 30 years - their entire financial position for all time - not just in a single Asset Class like Shares, but on a single Asset: their home.
This is high-risk gambling: speculating on prices always rising.
This isn't just a high-risk strategy without any "stop" on the downside or "buffer", but guaranteed to end in wipe-out for the overwhelming majority when, not if, the next group of speculators don't buy into the game and provide the "pay out" for current players.
None of this is new, unknown or radical. Under Menzies in the 1960's, increasing home ownership was a desirable policy. Howards' policy of unbridled, unlimited speculation in Residential Property was, and is, dangerously unsound.
All Political Parties, Lenders and especially the Reserve Bank, understand the problem, its consequences and inevitable outcome - and that Australia and its Government has very little control over multiple global events that could trigger this house of cards to unravel.
End of the Game
The title of this piece is "No Way Back, No Way Forward". We can't unwind our position, nor can we extend the game.
Nobody, in public, addresses or can even speak about, the end of the Boom and what follows.
Each year, the number of potential triggers for the Big Crash increases, while both the size of the Crash and the number of families who'll be wiped out in the first wave increases. The 1930's Great Depression started with the 1929 Stock Market Crash and went through multiple waves. The 2008 "GFC", Global Financial Crises, was triggered by the 2007 "Sub-prime Mortgage" crisis and went through multiple waves.
There is now no easy or pain-free way to unwind the current collective financial gamble. We're "all in" on the Residential Property game and waiting for the slightest wobble to bring everything down.
Everybody with debt loses and the rest will see their paper worth almost entirely evaporate.
We're not the first country to go down this road of a speculative real-estate bubble, nor have we not seen multiple local bubbles here before.
How have other economies fared when faced with the same dilemma?
Japan, but mainly Tokyo, suffered a huge real-estate bubble in the late 1980's. People took out 100-year mortgages to buy into the game. The "Savings & Loan" crash in 1989/90, based on high-risk "Junk Bonds", caused a financial meltdown that froze lending in the Japanese banks, freezing Tokyo prices. The Japanese Government has propped up "zombie banks" to avoid failing and realising the full losses from their Bubble.
Since 1990, the Japanese economy has stagnated, unable to lift itself out of the low-growth doldrums despite repeated heroic attempts.
The potential losses will be in the tens of trillions in Australia and nobody is immune or can escape.
There don't appear to be any risk-mitigation strategies, apart from selling up and leaving the country. Unlike the GFC where a very few traders saw the problem and created ways to bet against the system [the Big Short], nothing similar seems to exist. Nor like "Margin Call", will savvy players be able to escape, albeit bloodied and bruised, by getting out first.
"Hope is not a Strategy" will be the Political epitaph of the Boosters and Promoters who've begun and continued this unnecessary & unwise Bubble, where the bigger the Boom, the bigger the Bust.
Being Rich or Wealthy?
So, would you rather be "Rich", owning a home with little intrinsic value while owing massive debt which you can only afford if your whole life for the next 30 years goes absolutely perfectly? Nor can you ever cash out and spend your paper wealth: you've got to live somewhere, either Own or Rent. At retirement, "downsizing" won't make you a millionaire, those nice retirement villages are expensive. After the Covid-19 Pandemic, moving to "the country" isn't a bargain anymore.
Or would you rather have a modestly priced home with a good wage, full time job and career prospects, allowing you to live well now and invest your savings wisely and well?
This is the part that really kills. We're locked into this roller-coaster and can't get off, we all have to ride it to the end. The only part of this story we don't know is the most important:
When will Howard's Legacy, the Big Property Pyramid Scheme, destroy Australia's financial system?
If you have a home, especially with a mortgage, there's no point in selling because you need somewhere to live and have to buy into the same rising market.
There's No Way Back from this inevitable disaster and there's No Way Forward, the market cannot rise forever without increasing wages and a growing economy to pay for it.
No politician or lender will force the trigger & cause it,
and if we follow the Japanese and try to pretend "Nothing to see here", we're doomed economically.
The Political Question:
Nearly half Australia voters are "Millennials", most of whom have been priced out of home ownership at the same time as full time jobs and long-term careers have become rare.
99% of voters under 45 should be voting against this radically unfair system, but aren't.
Why is this so?
Maybe 10% of Australians, probably 1% or fewer, actually benefit from Howard's Big Property Pyramid Scheme, still being boosted by the so-called conservative Liberal / National parties.
How do the Liberal/National Coalition have more than 5% voter approval now, or even for the last 15 years, since the GFC?
Howard and his boosters & spruikers have to be given credit for being the absolute best "grifters" we've ever seen in Australia. A mantle they should not wear with any pride.
16,855,344 voters enrolled
5,859,803 under 40 vs 10,995,541 40 and over,
7,251,024 under 45 vs 9,604,320 45 and over.
25,791,702 total population [ABS]
16,836,672 enrolled voters
Leaving 8,955,030 under 18 or not enrolled
ABS Regional Population distribution
- The median age for capital cities (36.0 years) was younger than
the rest of Australia (41.2). - The oldest capital was Hobart with a median age of 39.6 years,
while Darwin was the youngest (34.3).
- People aged 20 to 49 years made up 45% of the combined capital city population,
compared with 36% of the population in the rest of Australia. - People aged 50 years and over made up a smaller proportion of the population in capital cities (31%) than in the rest of Australia (39%).
- 35 years at 30 June 2000
- to 38 years at 30 June 2020.
Demographia 2021 report on Housing Affordability: "severely unaffordable" list.
Perth WA, 6.0,
Melbourne VIC, 9.7
Sydney NSW, 11.8
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