How Buying a Home Worsens Inequality
|April 25, 2014||Posted by Catherine Cashmore under Editorials|
This 2014 excerpt of Australia’s Property Observer, Feb 14, is by Catherine Cashmore.
The consequences of inequality in the housing market are painful and slow. The trend is increasingly evidenced over a lengthy period of years – not in the volatility of month-to-month first homebuyer statistics – always marginalizing those at the bottom of the income stream, whilst advantaging those at the top.
The reason this has occurred is down to our property cycle – or perhaps better-termed a ‘land cycle’ – which has been further accentuated by poor housing policy – restrictive planning conditions and generous tax incentives, which are ultimately destructive.
Rising prices, and the expectation of such are initially seen as a ‘good’ thing, because they drive the economy, increasing consumption (the ‘wealth’ effect), stimulating economic growth, infrastructure investment, construction activity and demand for ‘durables.’
This in turn flows through to wages – which advantage the workers at the top of the income stream, rather than the labourers at the bottom. (See Andrew Leigh’s, The Story of Inequality in Australia (2013,) which points out, since the mid-1970s, earnings after inflation for the bottom tenth of the population has grown 15%, in comparison to 59% for the top tenth.)
The gains are subsequently capitalised into rising land values, as investors, buoyed on by inflationary expectations, easier lending conditions, and ‘fear of missing out,’ lead a bull market of speculative activity (such as we’re seeing in Sydney) – until reality eventually steps in, and the trend inevitably turns.
In other areas of the economy that suffer from inflation, some form of substitution can typically occur, however land – and the infrastructure that gives it its value – is fixed in supply, an absolute necessity to all business and personal needs, therefore as land values rise, there is an inevitable strain on productivity, affecting job growth, private debt, small business, and unemployment (such as we’re seeing in Australia presently.)
Whilst monetary policy and the interest rate ‘lever’ are employed to moderate the damaging effects of a property cycle – at every step of the process, real estate has been used as collateral for further economic investment, a revenue generating machine for government, and ‘wealth’ fund for retirement, therefore whilst the aim is to prevent a ‘hard’ landing, the motivation is always bent on protecting existing values, rather than letting them fall.
Without direct political intervention to rectify the damage, the greater and more destabilising the divide becomes, not only placing pressure on the welfare system, but evidenced ‘vocally,’ as rising numbers enter the housing market later, pay far more over the lifetime of their loan, and risk reaching retirement still servicing household debt – as is the case in Australia.
Needless to say, it doesn’t take much of an economist to understand that subsidies – no matter attractive they may seem – are ultimately capitalised into prices, thereby raising the entry costs for first home ownership further, and increasing the pain for the next generation of aspiring buyers.
Ed. Notes: Policy-wise, it’s not hard to make housing affordable and close the income gap. Just quit subsidizing the whole real estate industry and instead recover the socially-generated values of locations. Policy-wise, it’s simple. But psychologically, there’s the bear. Nobody wants to pay “rent” to their neighbors, everybody wants to take “rent” from their community.
The only way to settle that dilemma is to, yes, grant “rent” to residents but not via selling or letting out their sites but rather via paying citizens a dividend from all the recovered “rents” in the region (all the rental values of sites and resources and EM spectrum etc), sort of like what Alaska does and what Singapore does.
Since the dividend gotten back would be bigger than the typical land dues most people would pay, people wouldn’t resist paying “rent” but would be eager to in order to profit from the dividend!