Why housing prices are through the roof

September 22, 2021
Photo: Jorg Hertle / Pixabay

Lockdowns have kept you working from home for months. It’s been two years since your last overseas holiday. Your savings are piling up. It’s 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’d 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 median national property price was up by 18.4% compared with August last year.

Sydney’s housing has been cited as the world’s third least affordable, allowing for incomes, and Melbourne’s 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 10–20% of the purchase price) keeps vanishing.

In the year to August, the median national residential property price (half above, half below) rose by $103,400, to $666,514. In Sydney, a median-priced house 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?

Australia’s economy shrank last year and, with renewed lockdowns, GDP growth this year 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’s worth spelling out what the key reasons for the current boom are not.

Reasons that don't stack up

First, the explosion in housing prices has nothing to do with immigration or population growth. Last year, the population grew by 1.18%, less than in the preceding few years.

From July to September last year, the country’s population actually fell, by 4200 people, even as housing prices soared. Annual rates of population growth in recent years have been barely half those in the 1950s and 1960s, when housing prices were much more stable.

Another furphy, plugged vigorously by the Australian Financial Review, holds that the high housing prices reflect “low housing supply responsiveness relative to house prices and incomes”. 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 excessively slow and demanding approvals process, in which new construction is held hostage to environmental regulations.

But residential housing starts and completions rose strongly from late last year, suggesting that the degree of “responsiveness” in the country’s 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’t 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 persistent downward trend 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 “quantitative easing”.

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 “easing” 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’s 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 “derivatives” 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, median dwelling prices generally remained less than four times the average yearly household income. Steep rises then followed and, by 2014, the International Monetary Fund reported that Australia had “the third highest house price-to-income ratio in the world”.

A mid-year Westpac study 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, construction costs have risen at a rate close to the general level of inflation.

The federal government’s efforts to inflate its way out of the COVID-19 economic slump have made upward pressures on housing prices extreme.

In mid-2020, as much as $30 billion a month was being pumped into the Australian economy. University of Sydney academic Dr Cameron Murray calculated that the stimulus payments last year were “five times bigger than the post-GFC stimulus in terms of cash payments to households”.

Since last November, the Reserve Bank’s cash interest rate, 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’s 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 Australia Institute economist Matt Grudnoff, 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, Grudnoff noted, is “just shy of $10 billion annually”, 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 potent brew whose effect is to boost the returns from speculation.

In sum, the federal government’s 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.

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