13 Jun. 2006

Houses in motion

These last few years, in many cities of the world, rather a lot of dinner party conversations have revolved around the property market, or so I’m told. At first the talk was about how fast prices were rising, and how far it would go; later, when it would all come to an end. In the last few weeks the business press has been worrying itself sick about the impact of sustained, simultaneous interest rate rises in the US and Europe, and Japan finally looks set to join the trend. The cheap money of the last five years is flowing out with the tide.

Here in Sydney, bubble talk is old news. It burst way back in 2003. It’s a case study for pundits predicting the outcome of bubbles elsewhere – will prices plunge or just stay still for ages because people are reluctant to sell for a loss? In Sydney, it’s the latter: the median price has only fallen a little. But that’s enough to bring the housing construction industry to a crashing halt and keep the champagne bottles corked in real estate offices across the city.

But there’s another lesson to be learned from the Sydney bubble burst, a political one. Faith in the ability of magical levitating house prices to carry us all into the economic heavens hasn’t really been shaken. The propaganda arms of the property investment, real estate and construction industries have run a campaign to blame the downturn on taxes, red tape and environmental laws. They’ve been given plenty of space by newspapers big and small, eager to fill the gaps between the real estate ads. (At a chain of local papers where I worked last year, their press releases would run pretty much unadulterated.) Often they’ve made it into the news pages.

Along comes last Saturday's piece by Michael Duffy, in the Sydney Morning Herald [now behind a subscription wall]. He attacks former NSW premier Bob Carr (a great target for abuse, don’t get me wrong) for single-handedly bequeathing “the wreck of the housing industry”.

There were no external pressures on him to destroy jobs and the quality and affordability of housing: he did it all on his own, partly through sloppy decision making and partly in pursuit of environmental goals.
It is ridiculous to claim that state government policy is responsible for a downturn in the housing industry. Construction has long been among the most notoriously cyclical branches of capital. There are two reasons for that. First, its products are so long-lasting. Newly-built houses and office blocks compete with those constructed decades ago, so the industry is supplying for growth and the replacement of the small proportion of the built environment that needs replacing at any particular time. It doesn’t constantly restock the whole market like, say, the food industry. So it’s particularly susceptible to economic cycles.

Second, real estate is in a strange double position in capitalism. It’s a useful good in that we all have to live and work in buildings, and it’s made through a real labour process. But it also takes the form of a financial instrument like shares or bonds. Added to the everyday demand for dwellings and workplaces are the ups and downs of investor speculation. Reflections of the jagged lines of the financial market graphs are projected in our city skylines and suburban street maps.

So the construction industry suffers years of lean pickings as society makes do with the buildings it already has, and in Sydney that’s what has happened. It’s unlikely that Duffy’s prescription of opening up more land to developers, cutting red tape and lowering property taxes further would do much good. If it would, the state government would have already done it, since it’s so reliant on the property market for its own revenue – witness the deficit it’s been getting hammered about lately.

To suggest some semblance of public interest in rising house prices, these groups invoke the mythical figure of the Mum-and-Dad investor. Either they’re sensibly saving for retirement, or they’re ‘aspirationals’, chasing the lifestyle they deserve. As someone from the Real Estate Institute of NSW wrote (in a piece published in the Sydney Morning Herald’s Domain section on 25 March), “If owning your own home is the great Australian dream, then owning your own investment property is the great Australian aspiration.” Or, if you missed it in Domain, check out this piece explaining how the property market brings Mum-and-Dad investors together with first-home buyers and “fulfils everyone’s need for shelter, financial and emotional security”.

The property investment bug spread over the last decade, as boomers aged and prepared for retirement and banks channelled cheap finance into housing. But investment property ownership, as you would expect, is highly concentrated among households with the highest incomes and wealth. [1] It hasn’t spread very far even into the middle classes.

And one person's capital gains are another's inflation. Prices rise without any increase in production elsewhere in the economy. So while riding the bubble might make sense to those who can afford to jump on, it only increases their share of future output without adding to it. It’s no solution to the problems of an ageing population unless those houses are being used to stockpile pacemakers and cans of mushy peas.

Property has a lot in common with a pyramid scheme, in that to realise the gains you have to unload to someone in the future for more than you paid. The willingness of that someone to buy relies on their belief that they, in turn, will be able to offload it eventually themselves. But there’s one advantage over the average pyramid scheme: its agents don’t need to work hard to find a constant supply of rubes. We’re all the rubes because we all have to pay into the scheme in one way or another, buying or renting. Mum-and-Dad investors suck their incomes from Mum-and-Dad renters, while pricing them out of the buying market.

Anyway, if you missed out on the last boom you’ll be pleased to hear that “there has never been a better time to buy residential property in Sydney”. Get in while the bargains last.

[1] It’s difficult to extract the details from the econometrics of last year’s Reserve Bank survey, but the wordsmiths responsible for the report come to the unsurprising conclusion that “the propensity to own other residential property and the value held increases monotonically with income and wealth”, and “the marginal impact of income on the probability to own property is higher for investment property [than owner-occupied dwellings], consistent with investment property being more concentrated within those groups that have higher income.” (Interesting fact: According to the survey data, about eight per cent of households in the 15-24 age group own property they don’t live in… At least, it’s in their name.)