Housing Market Seeds That Bear Bitter Fruit

Oh dear, the first housing cracks are showing. House prices in Sydney are beginning to inflate so high that even dual income households are going to struggle to afford the million-dollar price tags.

In case you didn’t see the story, the Australian Financial Review reported:

‘A $1 million median will put the city at risk of losing essential service workers, including teachers, nurses and firefighters, and women who cannot afford to buy homes in the city where they work, experts say.’

When labour is being priced out — that brings consequences.

The higher land values go close to central Sydney, the further people on regular wages are pushed out, searching for a cheaper alternative.

That stresses public infrastructure because it has to stretch over an ever-growing sprawl. I don’t live in Sydney, but I’m told the traffic jams are quite something. Productivity declines because people spend longer and longer commuting.

There might be a heap of jobs in the city, but it’s no good if you have to spend half your life getting there and back. Quality of life declines.

Now, at the end of the day, if the local lolly shop has to get the flick, that’s bearable. But when teachers, nurses and police make for the hills, people begin to pay attention.

But don’t ask a mainstream economist for a solution. Or at least one that will work. Because for most economists, land doesn’t really exist.

And yet it seems so obvious that land is the most important factor of all in wealth creation. It’s also the collateral for most of the outstanding loans of our banking system.

Regardless, it’s not something they give importance to, so they don’t study it. And because they don’t study it, they don’t understand the dynamics behind it.

It’s why their economic forecasts are always off. I saw a joke about that recently: Why do economists exist? To make weather forecasters look good.

In the first issue of Cycles, Trends and Forecasts we told subscribers, ‘If you don’t understand the land market, you are blind to the risks you are taking when you invest.’

The GFC is the perfect case in point. In 2005 a journalist asked Ben Bernanke, who recently retired as Chairman of the US Federal Reserve, whether or not he thought US housing was in a bubble.

He responded:

‘Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize.’

Now, if you asked most mainstream economists they’ll say what he said was fair enough. Nobody else saw it coming either. But that isn’t true. It’s only true of the neoclassical economists like Ben Bernanke.

Consider the following quotes. This one comes from alternative economist Michael Hudson, who wrote in Harper’s Magazine in 2006:

‘The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.’

Or Fred Folvary who wrote in 2007:

‘As the economy heads towards the coming waterfall, we can’t stop it. Some will profit from it, many will suffer losses, some great losses, from the coming real estate collapse and economic depression.’

Think for a moment on the difference to the lives and bank balances of people who listened to Michael Hudson and Fred Folvary instead of Ben Bernanke. Property drives the business cycle.

There’s a graph my colleague Phillip J Anderson likes to show people. It measures public land sales in the United States over the centuries beginning in 1800. You can see it here…

US Public Land Sales

Source: The Secret Life of Real Estate and Banking

These spikes are land booms. Land speculation drives the boom and bust nature of the economy. Now, you can make a lot of money in a land boom. But you need to know it will go over the top eventually and take the economy down with it. The only question is the timing.

It’s exactly what happened in the years up until 2008. Land goes so high that labour and capital can’t afford it. But because so few study land (or history) they don’t see the connection.

Now, that’s not to say the housing market is going to bust anytime soon. But the seeds of the bust are sown in the boom. And as we can see from the story at the top of today’s article, the seeds are already sowing some bitter fruit.

Find out the rest of what you need to know here.


Callum Newman,
For Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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