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Victims of the housing bubble

Q: What’s faster than lightning?

A: The speed with which a “for sale” sign on a house is replaced by a “sold” sign.

Somebody wrote that on Facebook recently, in a happy mood, since they had just sold their house for a tidy sum. And we know it’s true, because everybody seems to be talking about it. I know some people who sold a house a couple of months ago. It had been delayed going on the market by a variety of factors. When they started talking about selling they were told they might get $650,000, but that was probably wildly optimistic and high $500,000s was probably closer to the mark. When the property did go on the market they got $690,000. And this sale, like most these days, was the culmination of a rapid-fire and rather desperate bidding war between potential buyers who had already tried and failed to buy similar houses, having been beaten out by higher bidders.

These are strange times, in the market for shelter. In years gone by a property went on the market at a set price. Buyers usually offered less, and after a bit of negotiating the sale would settle. These days, however, most properties go on the market with an advertised range. Market watchers quickly learn to decode the numbers. If, for example, the range is $650,000 to $740,000, we can probably feel confident that the property will sell for $760,000 or more. It might be suggested that some price guides are pitched to give more buyers the impression that they might be able to afford the place, generating more inquiry and more offers. I don’t know if this is true, but the price guides often seem to start a lot lower than the eventual sale price.

Almost every sale these days seems to end up being a de facto auction. Many would-be buyers have stories of racing to crowded inspections where others like them are already offering tens of thousands of dollars over the high end of the price guide. People are sometimes committing to buy sight-unseen, and the competition for good properties is absolutely cut-throat. It’s happening all over Australia, and not only in the capital cities. Buyers are trawling regional areas, driving up prices and pushing lower-paid locals out. On a recent driving trip around Northern NSW we heard the same thing in every town we visited: no houses for sale or rent, and desperate times for those without a lot of money behind them.

Interestingly, this is a global phenomenon. It’s happening in Sweden, my daughter tells me. I’ve read how it’s happening in many parts of the USA and Britain. This US article paints a familiar picture, for those who have been watching the situation. And here’s a similar one, from Britain.

And of course it’s not just would-be buyers who are struggling. Would-be renters have it just as bad or even worse. Open houses for rental properties are crowded too, and those with the most money are well-ahead of those without the advantages that brings. When I was young moving out of home was just a matter of deciding to. There were always places to rent. Not anymore. Now young people are staying with parents for much longer than they’d like to. Many are living in converted garages and caravans in backyards.

Bidding wars for rentals are common now too, even though they are technically not supposed to happen. I’ve heard real estate agents tell potential tenants that agents aren’t allowed to ask for higher offers but won’t refuse them if they are made. This article in The Newcastle Herald spells out the situation.

How has it come to this? It seems counter-intuitive in Australia, with tens of thousands of overseas students out of the market. Wages are static or falling, job-security is a mirage for many, so what’s going on? Obviously super-low interest rates mean would-be buyers can borrow huge sums, helping to bid up prices. The same low interest rates mean people with savings don’t want to hold cash, since it’s purchasing power is falling so fast. They want other assets instead, and real estate is top of the list for many. So cashed-up investors are crowding the marketplace, trying to escape the negative real returns on bank deposits by becoming landlords. They pay high prices for properties and demand proportionately high rents. Investors who borrow funds to buy real estate have the usual mad-generous negative gearing rules to sweeten the equation and of course the equally mad-generous capital gains tax regime to help them make their decision.

There may be worse to come, since foreign buyers – not so prominent since the advent of the pandemic and the Federal Governments anti-China diatribes – are likely to soon return in droves.

Real estate commentators always say the problem is “supply”. No doubt this is part of the picture. But what isn’t talked about is the role of the global finance industry and its enablers in central banks. By pumping trillions of freshly minted dollars into world markets as a response to the Global Financial Crisis they have deliberately inflated asset prices – which naturally includes property. I wrote about this aspect of the issue here, and I believe the article is still highly relevant.

By all means let’s have more housing supply. But even more important, in my opinion, is to stop treating the basic human need for shelter as a gilt-edged investment product. Investment dollars should be funneled into productive uses, not into simply pricing poor people into homelessness and sapping the economy of purchasing power. This is the result of short-sighted stupid policies that help the finance industry and hurt the real economy and the poor.

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