Why is housing so expensive? &&

August 14, 1996

By Neila Seciov

Whether buying or renting, the cost of housing eats up a considerable percentage of one's earnings. Housing costs have a vital effect on people's standard of living and yet receive remarkably little attention from politicians.

While politicians periodically express concern about rising interest rates, they neglect the price which buyers have to pay. Politicians attack interest rates because these can be blamed on the already unpopular banks.

If they were to look into prices, they would have to start with the real estate industry. This could arouse hostility not just from the industry, but among supporters and voters who benefit from the activities of auctioneers, estate agents and developers. Numerous politicians, on all sides of politics, also benefit from such activities.

Auctioneers and estate agents are hired by owners who are selling and renting property. Their operations are all aimed at increasing prices and rents, partly for the benefit of their clients but also to heighten their own commissions.

There is a two-fold connection between prices and rents: buyers who pay high prices want to increase rents to cover their capital costs, while landlords who are contemplating selling may inflate rents in order to make the price look like a good investment.

Sellers normally need no encouragement to seek the highest prices. But in the case of rents, the initiative often comes from letting agents who constantly urge landlords to increase rents. Until recently, many agents increased rents without consulting owners, though this practice has now been outlawed in NSW.

Ironically, increased rents do not necessarily lead to increased incomes for landlords. If rent is increased during the course of a tenancy, the tenant will often give notice, and the property may be vacant for three or four weeks. The landlord then has to pay the agent a re-letting fee and reimburse him/her for the costs of advertising. Moreover, once a unit is empty the need for refurbishment becomes apparent resulting in further delays and costs. If rent is increased at the beginning of a new tenancy tenants may rent only for a short period.

The frenzy to see prices and rents increase is fuelled by speculators, who do not regard houses and flats as places in which people live, but as commodities to be traded like shares, foreign currency, gold or pork-belly futures.

Speculators vary from the short-term investor (who is more interested in selling at a capital gain than collecting a steady rental income) to the person who buys and sells units off the plan for a profit. These people have strengthened, if not created, the general perception that property values will always go up and the feeling among owner-occupiers that they are "entitled" to a capital gain.

When they come to sell and have to pay capital gains tax, these speculators are given an exemption from inflation which they themselves have helped create!

Potential buyers live in fear that they must buy while they can still afford a deposit or miss out. This fear drives them to pay the inflated prices demanded by sellers.

Auction rigging

Sellers' expectations and buyers' fears are nurtured by the real estate industry and in particular by the auction system. Auctions are notorious for being rigged as auctioneers inflate sale prices by taking bids from "dummy bidders" planted in the audience or from colleagues feigning mobile phone conversations with non- existent bidders, or simply by "taking bids off the wall".

If they really wanted to, politicians could pass legislation to prevent auction-rigging. It would take only one successful prosecution with a jail sentence for an auctioneer and a conniving vendor to send shivers down the spine of the real estate industry. However, there is no indication that politicians — federal or state — have the slightest inclination to intervene.

Recently a hiccup in the market prompted politicians to express fears that home owners might not receive the capital gains they expect. While they feign sympathy with battlers struggling to buy a first home, their real sympathy is with those who benefit from, and actively encourage, the upward trend in prices. Politicians show no concern when inflation brings capital gains to the well-to-do.

During the federal elections John Howard voiced "concern" over the widening gap between rich and poor. Housing is a significant factor in making the rich richer and the poor poorer. Now his government is contemplating cutting Commonwealth housing funds and using taxpayers' money to subsidise the rents which poor tenants would pay to landlords of privately owned property! Landlords and the real estate industry must be chuckling with glee.