Lockdowns have kept you working from home for months. It鈥檚 been two years since your last overseas holiday. Your savings are piling up. It鈥檚 time to make that investment.
How about an investment property? A nicely situated apartment? People will always need somewhere to live.
Can you really afford it? Or does that even matter? You have the deposit, the banks are thrusting money at you, and interest rates are at rock-bottom. After inflation, you鈥檇 be paying real interest of not much more than 1%.
Any losses on a rental property and negative gearing lets you write them off against your tax liability. Sell the property after a year and the government gives you a 50% tax concession on your (likely fat) capital gains.
But you need to get in quick, the competition is ferocious. In August, the was up by 18.4% compared with August last year.
Sydney鈥檚 housing has been cited as , allowing for incomes, and Melbourne鈥檚 as the sixth worst. So borrow big, head for the auctions and pay whatever it takes. There are fortunes to be made.
The above, of course, is the stuff of fevered dreams.
Meanwhile, millions of people are finding that, because of the price boom, their savings target for a home deposit (typically 10鈥20% of the purchase price) keeps vanishing.
In the year to August, the (half above, half below) rose by $103,400, to $666,514. In Sydney, a will now set you back close to $1.4 million.
The situation may not seem so bad if you already own property and if your suburban dwelling has now made you a millionaire if you decided to sell up. But huge numbers of renters, especially younger people, are being permanently shut out from the capital gains candy-store.
Why has the property market gone crazy?
础耻蝉迟谤补濒颈补鈥檚 last year and, with renewed lockdowns, is expected to be slight. Wage growth remains almost stagnant.
Surely all that means housing prices should be depressed? No. To understand why, consider some of the underlying dilemmas of world capitalism and the methods that big-business governments use to try to counter them.
Before doing that, it鈥檚 worth spelling out what the key reasons for the current boom are not.
Reasons that don't聽stack up
First, the explosion in housing prices has nothing to do with immigration or population growth. Last year, the by 1.18%, less than in the preceding few years.
From July to September last year, the country鈥檚 population actually , by 4200 people, even as housing prices soared. Annual rates of population growth in recent years have those in the 1950s and 1960s, when housing prices were much more stable.
Another furphy, plugged vigorously by the , holds that the high housing prices reflect 鈥渓ow housing supply responsiveness relative to house prices and incomes鈥. The surge in housing prices, according to the AFR, stems from the slowness with which new housing is brought onto the market, despite strong demand. This, in turn reflects an , in which new construction is held hostage to environmental regulations.
But residential housing starts and completions from late last year, suggesting that the degree of 鈥渞esponsiveness鈥 in the country鈥檚 housing industry is not so bad. More important, the AFR does not explain why money should be pouring into the housing sector, including new construction, at a time when the economy overall is only just in positive territory and population growth is slowing.
Why then have housing prices headed for the moon?
Don鈥檛 expect the AFR or other corporate media to explain the fundamental causes because they relate ultimately to a contradiction of the capitalist system, pointed out in the 19th century by Karl Marx.
Real causes
As Marx explained, capitalism suffers from an innate tendency for the rate of profit to fall over time as workers, whose labour creates new value, are replaced by machines. Long dismissed by pro-business economists, this tendency is now well grounded in fact. Surveys reveal a over many decades in the rate of return on capital.
What do capitalist governments do, when falling rates of profit leave economies chronically prone to stagnation and recession? Their now-standard strategy is known as 鈥渜uantitative easing鈥.
This involves the creation of large quantities of new money, unbacked by any real value. Lent by central banks at ultra-low (even negative) interest rates to commercial banks, this money is then lent on cheaply to businesses and individuals. Or, as has happened repeatedly in this country in recent decades, money may simply be gifted by governments to the bank accounts of the population at large.
In theory, this 鈥渆asing鈥 will lead to businesses and individuals investing the cheap money in productive activity, setting off a virtuous cycle of new jobs and greater demand for goods and services.
In earlier decades, this was a fairly predictable outcome. But in the most recent years, as the underlying rate of profit has kept trending downward, the strategy has worked poorly, or not at all.
Whether capitalists invest in production depends, after all, on whether they can foresee making a profit. And amid today鈥檚 COVID-19-era economic crises, that is an optimistic call indeed.
If money is available at near-zero interest, while the profits available to private business from productive investment are small and high-risk, what are firms (and ambitious individuals) likely to do? The temptation to borrow big and to look for quick gains from speculation is powerful. The vehicles for this speculative activity include the share market, high-risk 鈥渄erivatives鈥 and residential property.
Prices unhinged from value
Over many decades until the 1990s, housing prices in Australia moved closely in step with the general rate of inflation. Deregulation of the banking and financial system in the 1980s, however, greatly increased the ease with which buyers could obtain loans to purchase real estate.
Until the late 1990s, generally remained less than four times the average yearly household income. Steep rises then followed and, by 2014, the reported that Australia had 鈥渢he third highest house price-to-income ratio in the world鈥.
A put the national median dwelling price at seven times the average household income. In Melbourne, this figure was eight times and in Sydney, 10.
Intriguingly, the rise in housing prices has had little to do with the actual value of the dwellings when measured in bricks, mortar and human labour power. Throughout, have risen at a rate close to the general level of inflation.
The federal government鈥檚 efforts to inflate its way out of the COVID-19 economic slump have made upward pressures on housing prices extreme.
In mid-2020, was being pumped into the Australian economy. University of Sydney academic calculated that the stimulus payments last year were 鈥渇ive times bigger than the post-GFC stimulus in terms of cash payments to households鈥.
Since last November, the , at which it lends to commercial banks, has stood at 0.1%. As well as being at a record low, this figure is substantially less than inflation, meaning that financial authorities are effectively paying the private banking system to urge loans on customers.
Tax breaks fuel the fire
The government鈥檚 tax concessions have added still more fuel to the fire. Negative gearing allows owners of investment properties to deduct any net losses on these investments from their general taxable income. According to , the main winners are older men in the top 20% income bracket, living in Liberal-held electorates.
The capital gains tax discount, introduced by the John Howard Coalition government in 1999, gives property owners a 50% tax concession on capital gains made when assets are sold, provided these assets have been held for at least 12 months.
The cost of this concession to government revenues, is 鈥渏ust shy of $10 billion annually鈥, and almost 80% of the gains go to the top 10% of households by wealth.
When combined, negative gearing and the capital gains discount make a whose effect is to boost the returns from speculation.
In sum, the federal government鈥檚 policies in the housing area are bringing about a vast shift of wealth from non-owners of residential property to owners. Levels of inequality are increasing, as Australians become divided rigidly into owners of housing and those compelled to rent it.