why is the housing market in Australia so bad?
In: Economics
After boomers got their houses, a trend arose to ‘play the property market’ and constantly seek after bigger and better houses. So they started proposing, and voting for, policies that would (among other things) restrict the amount of new land available for development – thus driving up the value of their homes. The focus shifted from ‘just living in your home’ to raising it’s value. This is a bit different from previous generations, that usually didn’t care so much about how much their house was worth on the market – because they planned to live in it for their lifetime and pass it on.
It doesn’t help that multinational companies buy up many houses to turn into rentals, since this limits the left-over available pool of houses for first-home buyers, thus driving up the prices even more.
It doesn’t help that one of the two main political parties base virtually their entire platform around encouraging more of these things – focusing on ensuring property and stock-owning boomers gain ever-more optimal value from the assets they own already, rather than helping people all the people who don’t own anything at all.
Tax rules, including negative gearing and a discount on capital gains tax make housing an attractive wealth-building investment. For people who bought houses decades ago when they were relatively cheap, as the value of their properties increased, the equity made it easy for them to buy multiple houses, and negative gearing made it less of a problem to pay higher prices for them. The result is that cashed-up older people priced young people out of the market and now older generations own a huge proportion of the wealth and young people have to rent.
There’s two big things – Negative gearing and the capital gains tax discount.
Negative gearing allows a property owner to write off losses they incur on their property against their income. So if you’re spending more money on your rental property (mortgage payments, repairs etc.) than you make back in income (rental payments), you can use it to lower your taxable income. This incentivises owning rental properties as they’re essentially a risk-free investment.
Capital gains tax discounts: when you sell a property you get taxed on the profit you make in the sale. The capital gains tax discounts allow you to lower the amount of tax you pay on the transaction (and if you know the game well enough you don’t pay any at all). It means if you’ve got property you can sell it and keep maximum profits, making it easier to buy more properties.
These two things together give people with property a massive leg up on those who don’t. They have more money so they’re able to bid higher and they can leverage their existing properties for mortgages to buy another property. This has created a system where continual growth in property prices is needed to keep it propped up.
There’s more factors, like continual fights over development and a phobia of apartments, but in terms of why prices continue to climb, that’s the structural reason.
Can you eli5 your question a bit more? What exactly do you mean by bad? From whose perspective is it bad? As a first time buyer in a major city or as a middle earner trying to move up the ladder?
Why is the market in Sidney or Melbourne different than London or New York Australia for example?
Currently? There is a global housing supply crunch in every decent country. This is partly a holdover from the freeze in construction during COVID and exploded as borders reopened and demand skyrocketed. Stimulus packages pushed inflation hard, but housing supply is pretty inelastic. Additionally, everyone (globally) is competing for construction materials.
But there is also a trend of housing investments from the ultra rich from China and Russia – before anyone says that Australia’s property is overwhelmingly locally-owned, I would remind people that it is trivially easy for the rich to acquire permanent residency here. Both countries are experiencing an outflow of capital due to crackdowns from their governments and the rich are looking to store their wealth overseas. This is a *very* big reason for housing prices skyrocketing in stable first-world countries.
For Australia specifically there is another factor – labor. Australia’s unions have made it very hard to import labor – they have to undergo strict skills assessments and have recognized qualifications, so with the crazy global demand they are instead moving elsewhere. Local labor is in serious short supply because COVID made a whole bunch of older workers decide to retire early. Those who have trade skills tend to gravitate instead towards the mining industry which pays amazingly well, so that exacerbates the shortage. Australia’s construction industry is also not particularly oriented towards building high-density housing, because the country has no shortage of land and people prefer houses. To explain – building high-rise apartments is a wonderful way to ease a housing shortage, but you need people with skills at working those heights. Australia has not enough people with those skills.
Then there is the controversial factor of immigration. Australia took in a LOT of new immigrants and students to repair the economy after COVID. Whatever you personally think about the merits or flaws of immigration, it does not change the fact that immigrants need a place to stay. This caused demand to explode even further.
It is a combination of factors that caused the housing shortage and skyrocketing rents globally across the first world, but Australia was hit worse than many others because of its circumstances.
Came here for the whines about boomers without supporting evidence and am not disappointed.
No new towns or municipalities are allowed to be created on the continent the size of North America, where the population is 10X.
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