Australia’s ‘fascination’ with real estate is leading us into trouble, putting households in ‘risky’ financial positions while starving other parts of the economy.
That is the view of one of the most influential economic actors in the country.
In a speech on Wednesday, Reserve Bank of Australia deputy governor Philip Lowe pointed to a trend that has wide and dangerous implications for Australia’s economic future. And it’s all based on the ballooning cost of real estate.
Since the early part of the century, the value of Australia’s land has risen at a far greater rate than any other asset, as the below graph shows.
That may sound like a good thing. After all, it means Australia is richer than it was. But according to Mr Lowe, that nominal increase in value does not represent a meaningful increase in wealth.
“Have we really become wealthier as a nation simply because the value of our land has increased?” he asked, before answering his own question with a bit of sass.
“The answer would clearly be yes if this increase was because we had discovered more land. To my knowledge, though, this has not happened.”
Nor, he said, has Australian agriculture become significantly more productive to account for the rise.
So what is the answer? Almost all the increase, Mr Lowe said, “has come from the higher value of the land upon which our dwellings are built in the towns and cities across Australia”.
In other words, it’s all down to the absurd rise in the cost of property in our cities, as this graph shows.
One of the main problems, said Mr Lowe, is that the increased money Australians are spending on housing has not been going into new housing stock, but into existing stock. In other words, land.
“So our fascination with housing,” said Mr Lowe, “is really, mostly, a fascination with land.”
So what are the causes?
Mr Lowe isolated two causes for this wonky increase in the value of land.
The first cause is easy access to home loans thanks to financial deregulation. Combined with the low inflation from the mid-1990s onwards, this has made it much easier for households to access large amounts of credit. Which means they can spend more on real estate.
The second cause is increased population. Since 1989, the Australian population has increased by more than 40 per cent, or around seven million people. That’s one of the fastest rates of any developed economy.
Monash University economist Professor Jakob Madsen told The New Daily that Mr Lowe is right about these two causes.
But while he acknowledged that Australian households’ obsession with property is in part to blame, he said the banks must also share the blame. He said that in the good times – like the mining boom of the first decade or so of the 21st century – banks tend to lend too readily.
“When there is a mining boom, there is a lot of money flowing into Australia, and it goes straight to the banks, and the banks don’t know what to do with it, so they lend it out.”
If the rise in the cost of houses is driven largely by credit, Professor Madsen said it “smells a little bit of a bubble”.
“And if it’s a bubble, then it’s unproductive. It doesn’t say anything about the future. And so in that sense, the wealth is a fiction.”
Both Mr Lowe and Professor Madsen said the challenge is to take wealth out of unproductive assets like urban land, and direct it towards productive economic activity.
Mr Lowe’s suggestions included “strengthening of the culture of innovation”, “the removal of unnecessary and overly complicated regulation”, and “making competition work effectively in markets across the country”. He also said building efficient infrastructure that encourages productivity is key.
While Professor Madsen agreed with Mr Lowe, particularly on the culture of innovation and the infrastructure, he had a simpler solution to take the heat out of the property market: introduce a property tax to replace stamp duty.
This, he said, “would lower property prices substantially” because it would make it more expensive to own a property. That would push borrowing down, therefore reducing the danger of creating a bubble.