Have you heard of the new scheme to solve the Australian housing affordability problem? After we read the articles about it this morning we couldn’t help of Kim Jong-Il’s line in Team America: Why is everyone so ****ing stupid?
“A national incentive scheme involving tax credits, cash payments, stamp duty concessions, bond issues, and other benefits has been proposed as a way of encouraging private sector investment in more than 10,000 new homes a year for low and middle-income households,” reports Mark Phillips in today’s Australian Financial Review.
So new and serious is this problem that new terms are being invented to describe it. “Housing stress,” is one of them. You also have “mortgage stress” and “rental stress.” Soon to come, post-traumatic, subprime stress.
These terms loosely indicate, we suppose, the financial and personal anxiety that come when you have to spend close to 30% of your income on rent or mortgage payments, as if it were a grave medical condition.
Oops. Did we say “have to spend?” Our mistake.
Does a man have to spend a certain percentage of his income on rent or mortgage? Does Liz Taylor have to wear diamonds? Does Donald Trump have to wear an absurd comb over? Do we really have to refer to ourselves as we?
Not so far as we can tell. Some decisions are pure expressions of vanity. People go long pride and short common sense. Such is the case in the Australian housing market. What we have here with this housing scheme is a boneheaded solution to a fictional housing affordability problem.
Don’t get us wrong. There are definitely some houses that are not affordable to a lot of new and first-time buyers. Having just spent the last few days throwing elbows while competing for a rental property, we can attest to the fierce competition for certain rental properties. There are lots of people who want to live on quiet, tree-lined streets, not far from the beach or the CBD. No surprise there.
What we can’t figure out is how building 15,000 new units a year will solve the problem of everyone wanting to live in the same nice neighborhoods. It’s not that there is a shortage of housing supply. It’s that everyone wants to live in the same places. And lest we checked with the laws of physics and social propriety, this was neither possible nor acceptable.
Is there a shortage of homes with roofs for Australians to count sheep in at night. Obviously not, or else people would be living in the public parks with only the blue sky for a roof. It’s not that there isn’t enough housing. It’s that the housing everyone wants has gone way up in price because of low interest rates.
A grab-bag of incentives won’t solve this problem. The real problem is the inflated expectation that everyone can own a $350,000 home with a backyard, near the coast, but with plenty of privacy and room for a garage. That isn’t so much an expectation as it is a financial fantasy that’s run headlong into geographic, demographic, and financial reality.
Have you ever heard of the fictional Lake Wobegon made popular by American author Garrison Keilor? In Lake Wobegon, “all the children are above average.” That of course, is not popular. But that is really the goal of the new housing scheme, to make everyone, regardless of age or financial circumstances, “above average” in housing terms. But maybe it’s just not possible for everyone to have the same dream at the same time. We know, it goes against the whole spirit of the age to suggest that you can’t always get what you want. But maybe the Stones were right.
It will not be popular, but our suggestion to the housing crisis is that Australians downsize their expectations to come more into line with reality. Our father once put it to us another way, when we were 15 and complained that we couldn’t stay out late with car keys like our older brothers. “That’s because you’re not an adult yet, and you can’t drive,” he said. “When you grow up to be an adult, you’ll be able to do grown up adult things.”
The problem today is that we are all encouraged to be financial adolescents, to believe that you can have something for nothing, that you don’t have to delay gratification and save for a rainy day, and that if you want something you can’t really afford, you “owe it yourself” to buy it on credit. This is childish behaviour, and appealing to Big Brother or the Nanny State to fix it for you is a childish reaction.
We would love to have a house in the beach too, but wishing doesn’t make it so, and neither will more credit, more incentives, or new laws. In a nation of growing cities not everyone can live in the CBD in low-priced house. It doesn’t matter what kind of well-intentioned but naïve egalitarian fantasy you subscribe too. Besides, why should tax-payers subsidize builders to provide homes for renters who can’t afford homes? We would like to live in Jim Roger’s old, umpteen-million dollar apartment in Manhattan, but we don’t see any subsidies lying around for that, nor would we expect to.
No matter how we twist and turn the subject-slash stamp duty, give more tax credits, increase the grant size for first-time buyers, incentive builders-it all comes down to the same thing: a subsidy with the goal of putting everyone in a nice house in a nice neighborhood all at once, which of course, is utter nonsense.
What plans like this fail to recognize is income mobility over time. Really valuable goals usually take time to achieve, especially with money. Your financial situation changes over time, and so do your means and ambitions. When you use your brain to think about it of course it makes sense that a first-time home-buyer in his early twenties can’t afford a property in one the most desirable and fastest growing cities in the world.
Is there any cosmic injustice in that? Or is that just the way it is and has always been? Do we really need a comprehensive policy to alleviate this inequality? Can’t somebody do something about all the problems?
Nice places to live, unlike personal incomes, can’t be automatically redistributed by government confiscation, at least not yet. Over time, a young man starting his career will begin to earn more. He might even save some money. Then, later, as his skills and experience accumulate, so will his savings. And then, a little later in life, he’ll have the capital, and probably the desire, for a more permanent roof over his head. He’ll be a decent credit risk. He’ll get a mortgage. And maybe he’ll buy a house.
The solution to the Australian housing affordability crisis (in addition to downsizing your expectations) is two fold: save more money and make more money over time is the first solution. The second is for well-intentioned morons to quit throwing more money into the mix to drive house prices up. They are already too expensive. An increase in the supply of money and credit is what’s made housing so unaffordable, not any real shortage of places to hang your hat at night.
That is how the whole situation works itself out in the fantasy of Markets and Money land. But these days, we are taught to believe and expect that if you want something, you ought to be able to have it right away, with no money down. And if you can’t get it, the government should do something about right away.
Another name for redressing the injustice of not getting exactly what you want exactly when you want it is “Democracy,” whereby you can make other people pay for what you want through majority rule. The Howard government made a stupid promise when it said it would keep interest rates low, seeing as how the Reserve Bank, and not the government, controls interest rates. And now, the mis-guided public will probably make similarly stupid mistake and approve of a scheme which does nothing to solve the problem.
And we’re not having a go at Australia, here. As we’ve said, we love the place. But stupid politicians and bad monetary policy seem to know no bounds. And for the record, this central bank, compared to the Federal Reserve in our homeland, is remarkably prudent and responsible. That won’t solve the Australian housing affordability problem. But neither will this latest hair-brained scheme. What we really need is a good old fashioned mean-reverting crash. Those are never welcome by anyone. But they still happen anyway.
Markets and Money