Going to throw out an opinion that might be a bit unpopular because it goes against the type of populist views that exalt the 'mum and dad' little guy trope.
The author mentions a few things about negative gearing, and remarks that changes to negative gearing serve less to level the playing field and more to "to push out pesky mum-and-dad investors in favour of large institutional landlords". The tone and sentiment seemingly implies that he may have sympathetic views towards the average mum-and-dad investors, and may view them as being unfairly disadvantaged in the face of institutional investors.
Firstly, large institutional landlords also take advantage of negative gearing tax concessions, so it's not exactly clear how reforming or abolishing negative gearing tax concessions would favour them over the mum-and-dad investor types.
Secondly, while it's a common trope that mum-and-dad landlords treat their tenants better than large institutional landlords, I've never seen any actual evidence to back up this view.
I've seen plenty of anecdotal claims about large institutional landlords being terrible to their tenants, but I've also seen plenty of anecdotal claims about mum-and-dad landlords being terrible to their tenants.
It honestly just seems like some whishy-washy idealistic trope about how the mum-and-dad investors are so noble and great, even though there's no firm evidence that indicates that they're better landlords than large institutional landlords.
Thirdly, while there'll always be a demand for rental properties from certain segments of society, it doesn't exactly change the fact that most tenants don't exactly want to be tenants. Opinion poll research on tenants conducted by the AHURI generally shows that a large majority of tenants would prefer to own their homes outright rather than being renters.
I bring this up, because plenty of tenants who show up at auctions hoping to buy their first homes end up getting outbid and blocked from buying their first homes by cashed up 'mum-and-dad' investors, who in turn become their landlords.
Mum-and-dad investors buying rental properties does increase the supply of rental properties, which on the surface would push rental prices down.
But they simultaneously stop potential first-home buyers from buying their first homes, which forces them to remain in the rental market longer. This keeps the demand for rental properties higher than it otherwise would be, which helps to counteract any lower price effects that the increase in rental supply would cause.
I'm more sympathetic to those who are trying to buy their first home, rather than those who are trying to buy their third or fourth home. It genuinely doesn't matter if a landlord is a large institutional investor or a 'mum-and-dad' investor, they're both going to crowd out potential first home buyers and keep them trapped in a rental market they'd prefer to leave.
Fourth, there's not exactly any strong evidence that negative gearing has kept housing prices down, but as a tax concession, it still takes billions of dollars out of the federal budget each year. That's money that could be used for something like the type of public housing developer that Cameron Murray advocates for.
Even if you don't think changing negative gearing will have any positive effects on housing prices, it's still a waste of money that could be used for far better use.
Yes, well spotted - I do have a bias in favour of small, long-term accommodation service providers (mum-and-dad investors, if you like) over large institutional investors. This is the last bastion of free enterprise open to ordinary individuals in Australia, and it is now being replaced. Our existing system, while not perfect, works reasonably well. The alternative is not better — it simply favours a different set of stakeholders. And there is plenty of evidence suggesting it may actually be worse for renters, if you care to look. Take Germany, for example: dominated by institutional landlords, yet regularly seeing protests over rent hikes. Or look at this recent UK developments and research on large landlords: https://youtu.be/dISPuxthBOs?si=xWhwtpthALgs1rms&t=454
And regarding the third point, it seems you’ve missed the point that renting and buying are substitutes, meaning the cost of each option is comparable.
Yes, prices are temporarily on the expensive side, but calling it “a bubble” may create expectations of a violent burst. It may simply deflate quietly instead — already evident in Sydney, for example. Incomes are rising by ~3% p.a., and banks are offering nearly a 200-basis-point (2%) discount on standard variable mortgages, rather than the usual ~0.6%. Let’s see tomorrow whether interest rates are cut or remain stable.
Isn't the cost of principal repayments an issue. This 'forced saving' is much bigger than most people want, and prevents them from spending on other things. Back in the day we had credit rationing to curb the growth in home prices.
Maybe. Maybe for SOME people it's more saving than they want. But with offset and redraw facilities, you can also choose to vary the amount of principal repaid. Many investors choose not to repay principal, for example.
From a Melbourne newspaper report in the 1880s: 'We are confident that the present activity will be maintained and the values in all the new suburbs will continue to rise'.
Haha! Yep, I have a long article on that land boom.
However, although it seems like prices have risen quite a bit, they haven't seen the feverish growth of the 1880s.
In fact, inflation-adjusted apartment prices in Sydney haven't increased for a decade. Yes, some parts of Australia are quite inflated relative to historical norms. But we haven't seen a wild 1880s style boom
Cameron, it seems that there are other drivers that have not shifted the overall demand, but have shifted the mix from owning to renting, such as the negative gearing and capital gains tax,. These widened the customer base, pushing up prices and shifting more housing towards investment/renting. Without that change, prices may be lower and more people may be owners, rather than renters?
Fair comment, but how would you actually measure the impact of negative gearing or capital gains tax on changes in property prices over time? The challenge is that both policies have been in place for a very long time, and during that period the proportion of owners/buyers to renters has shifted only by single digits. Property prices have risen and fallen, and different locations have moved at different times and at different speeds.
Put simply, how do you factor either policy into predicting what prices will do over the next 5–10 years? Or can they be ignored entirely?
And I think you missed one key point: renting and buying are substitute accommodation options. Therefore, rents and the cost of buying are linked and comparable. So the shift in the proportion of owners/buyers to renters is most likely driven by factors other than affordability.
Unfortunately, that’s a naive take from Alan. You can’t convince millions that house prices should stop rising to help an “unnamed few.” Housing has always been — and will remain — an investment. Long-term returns rival equities. Too good to ignore.
That is the benefit. The cost is in social dislocation that leaves an opening for unscrupulous people on the extreme left and right to flame fear, anger and hatred.
People who have paid 9 times earnings would no doubt like to see that ratio watered down through ongoing price rises. But if their income rises, and prices simply hold, they still come out ahead. The 33% of the population who have no home of their own will be much happier if the ratio falls, not due to price falls but because incomes rise and prices hold. This could be the aim for the long term. Steve Keen has the idea of restricting lending based on a multiple of rental income that is worth exploring.
The analysis assumes that the ratio debt to income is of no import whatsoever. But there comes a time in any bubble where incomes fail to appreciate as interest rates increase, there is a collapse in economic activity and employment, the bailiff arrives and you are out on the street. At that time the price of houses starts to decline precipitously as is happening in 50% of states in the US currently.
It was China that saved us after 2008 when the sub prime loan situation created a liquidity squeeze, lenders closed their doors resulting in steeply falling house prices in the USA.
Ominously, its the public sector in Australia that has taken up the slack in employment over recent years. That can't go on forever. Its limited by the Government's capacity to take on extra debt. Its the cost of government borrowing that puts a floor under interest rates. Lenders will also be looking at the rate of inflation and worrying about the loss of value in the currency. Institutions will choose low inflation environments to conserve value. Lending to Australian's will dry up unless interest rates are increased.
Your analysis depends on the maintenance of a state of 'business as usual'. It depends on a societies ability and willingness to sustain the incomes of low to to middle income earners. That went out the window when interest rates were suppressed by central banks to try and keep the wheels turning.
No, you cant assume the steady state of 'business as usual'.
Thanks for your comment, Erl. You touched on a few important considerations from a broader economic perspective, but it’s also worth considering what the response has been in the past from the government, the RBA, and the banks to rapidly changing economic conditions. In every case, the worst-case scenario was avoided, so the probability of things playing out differently in the future is rather small.
Yes, these are real threats, but if you look at what actually happened during, for example, the 1991 recession, the 2008–09 GFC, or the 2020 COVID-related economic shutdown, it gives a good guide to what is most likely to happen going forward.
The model abstracts away the complexity of the myriad interactions between economic factors and instead focuses on just two variables: incomes and interest rates — because those two inevitably reflect the broader economic environment.
"The analysis assumes that the ratio debt to income is of no import whatsoever"
That's true. For pricing. For macroeconomic risk, maybe the amount of debt and composition of debt holders matters to the degree it affect the speed of price adjustments. But there seems to be no issue about that debt right now
What about the impact of Australia's housing policy on wealth distribution? The cohort of house owners seems to be getting older and richer compared to the cohort of renters. Further the lack of any estate tax/death duties mean that wealth inequality is transmitted from generation to generation.
Well, the model does not attempt to address broader housing policy implications; it focuses only on isolating easy-to-measure variables that are strong—and almost complete—predictors of future prices. These are incomes and interest rates. But a solution to wealth-distribution inequality could still be achieved by targeting just those two variables for the greatest impact.
Going to throw out an opinion that might be a bit unpopular because it goes against the type of populist views that exalt the 'mum and dad' little guy trope.
The author mentions a few things about negative gearing, and remarks that changes to negative gearing serve less to level the playing field and more to "to push out pesky mum-and-dad investors in favour of large institutional landlords". The tone and sentiment seemingly implies that he may have sympathetic views towards the average mum-and-dad investors, and may view them as being unfairly disadvantaged in the face of institutional investors.
Firstly, large institutional landlords also take advantage of negative gearing tax concessions, so it's not exactly clear how reforming or abolishing negative gearing tax concessions would favour them over the mum-and-dad investor types.
Secondly, while it's a common trope that mum-and-dad landlords treat their tenants better than large institutional landlords, I've never seen any actual evidence to back up this view.
I've seen plenty of anecdotal claims about large institutional landlords being terrible to their tenants, but I've also seen plenty of anecdotal claims about mum-and-dad landlords being terrible to their tenants.
It honestly just seems like some whishy-washy idealistic trope about how the mum-and-dad investors are so noble and great, even though there's no firm evidence that indicates that they're better landlords than large institutional landlords.
Thirdly, while there'll always be a demand for rental properties from certain segments of society, it doesn't exactly change the fact that most tenants don't exactly want to be tenants. Opinion poll research on tenants conducted by the AHURI generally shows that a large majority of tenants would prefer to own their homes outright rather than being renters.
I bring this up, because plenty of tenants who show up at auctions hoping to buy their first homes end up getting outbid and blocked from buying their first homes by cashed up 'mum-and-dad' investors, who in turn become their landlords.
Mum-and-dad investors buying rental properties does increase the supply of rental properties, which on the surface would push rental prices down.
But they simultaneously stop potential first-home buyers from buying their first homes, which forces them to remain in the rental market longer. This keeps the demand for rental properties higher than it otherwise would be, which helps to counteract any lower price effects that the increase in rental supply would cause.
I'm more sympathetic to those who are trying to buy their first home, rather than those who are trying to buy their third or fourth home. It genuinely doesn't matter if a landlord is a large institutional investor or a 'mum-and-dad' investor, they're both going to crowd out potential first home buyers and keep them trapped in a rental market they'd prefer to leave.
Fourth, there's not exactly any strong evidence that negative gearing has kept housing prices down, but as a tax concession, it still takes billions of dollars out of the federal budget each year. That's money that could be used for something like the type of public housing developer that Cameron Murray advocates for.
Even if you don't think changing negative gearing will have any positive effects on housing prices, it's still a waste of money that could be used for far better use.
Yes, well spotted - I do have a bias in favour of small, long-term accommodation service providers (mum-and-dad investors, if you like) over large institutional investors. This is the last bastion of free enterprise open to ordinary individuals in Australia, and it is now being replaced. Our existing system, while not perfect, works reasonably well. The alternative is not better — it simply favours a different set of stakeholders. And there is plenty of evidence suggesting it may actually be worse for renters, if you care to look. Take Germany, for example: dominated by institutional landlords, yet regularly seeing protests over rent hikes. Or look at this recent UK developments and research on large landlords: https://youtu.be/dISPuxthBOs?si=xWhwtpthALgs1rms&t=454
And regarding the third point, it seems you’ve missed the point that renting and buying are substitutes, meaning the cost of each option is comparable.
According to the model, something has to give: either prices ease, interest rates fall, incomes rise, or some mix of all three.
So we have a bubble.
In the 12 months since from what I can gather only interest rates have fallen enough to close the 9% unaffordability gap.
Inflation on the rise, interest rates to increase again?
Yes, prices are temporarily on the expensive side, but calling it “a bubble” may create expectations of a violent burst. It may simply deflate quietly instead — already evident in Sydney, for example. Incomes are rising by ~3% p.a., and banks are offering nearly a 200-basis-point (2%) discount on standard variable mortgages, rather than the usual ~0.6%. Let’s see tomorrow whether interest rates are cut or remain stable.
Isn't the cost of principal repayments an issue. This 'forced saving' is much bigger than most people want, and prevents them from spending on other things. Back in the day we had credit rationing to curb the growth in home prices.
Maybe. Maybe for SOME people it's more saving than they want. But with offset and redraw facilities, you can also choose to vary the amount of principal repaid. Many investors choose not to repay principal, for example.
From a Melbourne newspaper report in the 1880s: 'We are confident that the present activity will be maintained and the values in all the new suburbs will continue to rise'.
Haha! Yep, I have a long article on that land boom.
However, although it seems like prices have risen quite a bit, they haven't seen the feverish growth of the 1880s.
In fact, inflation-adjusted apartment prices in Sydney haven't increased for a decade. Yes, some parts of Australia are quite inflated relative to historical norms. But we haven't seen a wild 1880s style boom
https://www.fresheconomicthinking.com/p/does-victorias-rollicking-1880s-land?utm_source=publication-search
Cameron, it seems that there are other drivers that have not shifted the overall demand, but have shifted the mix from owning to renting, such as the negative gearing and capital gains tax,. These widened the customer base, pushing up prices and shifting more housing towards investment/renting. Without that change, prices may be lower and more people may be owners, rather than renters?
Fair comment, but how would you actually measure the impact of negative gearing or capital gains tax on changes in property prices over time? The challenge is that both policies have been in place for a very long time, and during that period the proportion of owners/buyers to renters has shifted only by single digits. Property prices have risen and fallen, and different locations have moved at different times and at different speeds.
Put simply, how do you factor either policy into predicting what prices will do over the next 5–10 years? Or can they be ignored entirely?
And I think you missed one key point: renting and buying are substitute accommodation options. Therefore, rents and the cost of buying are linked and comparable. So the shift in the proportion of owners/buyers to renters is most likely driven by factors other than affordability.
Alan Kohler canvasses the idea in this video, though he also links price changes with immigration and interest rates.
https://www.facebook.com/share/v/1GTuHFrAyB/
Unfortunately, that’s a naive take from Alan. You can’t convince millions that house prices should stop rising to help an “unnamed few.” Housing has always been — and will remain — an investment. Long-term returns rival equities. Too good to ignore.
That is the benefit. The cost is in social dislocation that leaves an opening for unscrupulous people on the extreme left and right to flame fear, anger and hatred.
People who have paid 9 times earnings would no doubt like to see that ratio watered down through ongoing price rises. But if their income rises, and prices simply hold, they still come out ahead. The 33% of the population who have no home of their own will be much happier if the ratio falls, not due to price falls but because incomes rise and prices hold. This could be the aim for the long term. Steve Keen has the idea of restricting lending based on a multiple of rental income that is worth exploring.
The analysis assumes that the ratio debt to income is of no import whatsoever. But there comes a time in any bubble where incomes fail to appreciate as interest rates increase, there is a collapse in economic activity and employment, the bailiff arrives and you are out on the street. At that time the price of houses starts to decline precipitously as is happening in 50% of states in the US currently.
It was China that saved us after 2008 when the sub prime loan situation created a liquidity squeeze, lenders closed their doors resulting in steeply falling house prices in the USA.
Ominously, its the public sector in Australia that has taken up the slack in employment over recent years. That can't go on forever. Its limited by the Government's capacity to take on extra debt. Its the cost of government borrowing that puts a floor under interest rates. Lenders will also be looking at the rate of inflation and worrying about the loss of value in the currency. Institutions will choose low inflation environments to conserve value. Lending to Australian's will dry up unless interest rates are increased.
Your analysis depends on the maintenance of a state of 'business as usual'. It depends on a societies ability and willingness to sustain the incomes of low to to middle income earners. That went out the window when interest rates were suppressed by central banks to try and keep the wheels turning.
No, you cant assume the steady state of 'business as usual'.
Thanks for your comment, Erl. You touched on a few important considerations from a broader economic perspective, but it’s also worth considering what the response has been in the past from the government, the RBA, and the banks to rapidly changing economic conditions. In every case, the worst-case scenario was avoided, so the probability of things playing out differently in the future is rather small.
Yes, these are real threats, but if you look at what actually happened during, for example, the 1991 recession, the 2008–09 GFC, or the 2020 COVID-related economic shutdown, it gives a good guide to what is most likely to happen going forward.
The model abstracts away the complexity of the myriad interactions between economic factors and instead focuses on just two variables: incomes and interest rates — because those two inevitably reflect the broader economic environment.
"The analysis assumes that the ratio debt to income is of no import whatsoever"
That's true. For pricing. For macroeconomic risk, maybe the amount of debt and composition of debt holders matters to the degree it affect the speed of price adjustments. But there seems to be no issue about that debt right now
What about the impact of Australia's housing policy on wealth distribution? The cohort of house owners seems to be getting older and richer compared to the cohort of renters. Further the lack of any estate tax/death duties mean that wealth inequality is transmitted from generation to generation.
Well, the model does not attempt to address broader housing policy implications; it focuses only on isolating easy-to-measure variables that are strong—and almost complete—predictors of future prices. These are incomes and interest rates. But a solution to wealth-distribution inequality could still be achieved by targeting just those two variables for the greatest impact.