Ross Gittins nailed it perfectly yesterday when he noted that Australia is a country essentially run for the benefit of (usually indebted and older) home-owners, who are subsidised by a voiceless class of (generally younger) renters.
There are the obvious inequalities that the wealthy land-owning class receive, largely through our discriminatory tax system. The most significant, but rarely mentioned, is the capital gains tax (CGT) exemption for your principal residence. There is no justification for this outright theft from non-home-owners and which transfers tens of billions annually to land owners. The principle CGT tax exemption is all the more outrageous given a material reason for land prices increasing is infrastructure spending, which is paid for by all tax payers but capitalises to landowners only. There’s also the more obvious and widely reported negative-gearing rort, which is more idiotic but actually far less costly.
But arguably the greatest unfairness being propagated on non-homeowners is the stance taken by the RBA in keeping interest rates at a record low of 1.5 percent, well below their natural level. This acts to further transfer wealth away from savers and those who don’t borrow towards the segment of society who chose to borrow (often beyond their means) to purchase a property.
The continued ranting of my usually very astute learned colleagues, Dyer and Keane, is an excellent example of how even intelligent observers can utterly lose the plot when it comes to housing. Keane and Dyer pen a weekly vicious critique of the AFR, and inflation hawks like Warwick McKibbon, for suggesting interest rates be raised above all-time lows. Quite simply interest rates remain lower than level of even reported inflation, that means in real terms, savers have to pay to place their money in the bank, and the indebted borrowing class have seen their assets falsely appreciate in price.
In a properly functioning market, those who save money are rewarded in a small way. Those savings should be used to grow the productive base of the economy. To ensure people are incentivised to save, the rate of interest needs to be set at the appropriate level (which historically is a few percent above the prevailing inflation rate to compensate savers for their opportunity cost). When rates in real terms are negative, that means borrowers are getting too good a deal, and savers are getting screwed. The other direct effect of having an interest rate setting that is too low is that the price of assets like housing and shares increases as speculators try to increase their yield.
This is why the massive appreciation in house prices over the last 20 years has almost nothing to do with supply (it very rarely has in any global property boom) but has everything to do with how much banks are willing to lend and the associated cost of that debt. It’s no surprise that the boom has directly correlated with the drastic increase in mortgage debt compared to GDP. The recent (very small) drop in house prices similarly has come from banks starting to slightly tighten lending practices, from utterly irresponsible to just very irresponsible. As a result, the RBA’s policy of keeping interest rates at a historical record low means house prices appreciate more, this makes housing even more unaffordable for the young and sees the gains flow into the pockets of wealthy baby boomers.
Last week, Keane and Dyer bemoaned in their diatribe against the mere thought of an interest rate rise from record low levels, that “[we now have] the kind of economy that we were told back in the 1980s and 1990s by reformers and business was exactly what we needed: low inflation, low wage growth, high employment. Now we have it, and no one’s happy about it.”
Wanna know why no one’s happy about it guys? Because we have a mirage of economic success based almost solely upon excessive use of debt to bid up the price of a totally unproductive asset (housing) that has largely been caused by the RBA failing to set interest rates at the correct level for six years. And that so called great economy has been created to benefit one specific cohort of society – people aged over 40 who own property.
There has been a war waged (very successfully) by both major parties against everyone under the age of 40. Their artillery is a grotesquely unfair tax system and a moronically low interest rate regime, which encourages reckless behaviour and has also ensured land-owners profit at the direct expense of those who were too unlucky or too young to own a property. And their foot soldiers in this war are existing home owners, just like Bernard, who want to ensure the price of their main asset doesn’t fall low enough to allow a 30-year-old to be able to afford it.
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Adam Schwab is a former lawyer and current company director and angel investor, and the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.