tag:theconversation.com,2011:/nz/topics/safe-as-houses-2028/articlesSafe as houses – The Conversation2012-01-10T19:22:09Ztag:theconversation.com,2011:article/47922012-01-10T19:22:09Z2012-01-10T19:22:09ZThe devaluing dream; why Australian suburbia is an economic disaster<figure><img src="https://images.theconversation.com/files/6685/original/39mb6f68-1324431594.jpg?ixlib=rb-1.1.0&rect=7%2C12%2C985%2C779&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian suburbia: a work of art, but in the wrong place?</span> <span class="attribution"><span class="source">Suburban Exterior (1993) - Howard Arkley/AAP</span></span></figcaption></figure><p>In spite of what everyone believes through natural pride and vanity, the family house is an asset that depreciates. </p>
<p>Don’t be deceived that the value of property goes up and up, which of course it does. The rising prices are caused by the land becoming more expensive, not the house itself. </p>
<p>Rising property values create the illusion that the pile of bricks has appreciated. Alas, the building stock itself often sinks in value and within a couple of generations can even end up with a negative value, because the next owner pays to get it demolished. </p>
<p>With rising demand for the land, the chances of any given house becoming obsolete have increased. The same pressure on the land that causes property prices to exceed inflation simultaneously puts pressure on the existing building stock to be replaced by something more efficient. As a result, the lifespan of Australian houses is falling and the likelihood of the building stock appreciating is decreasing.</p>
<p>There are structural reasons that conceal the historical devaluation of Australian building stock. The bricks and mortar are often valued according to their replacement cost, because the calculation is performed for the sake of insurance. If a house burns down, say, it will cost a great deal to erect the same house again. The replacement cost is always greater than the original cost, thanks to the normal pressures of inflation on labour and resources. This valuation is logical if the decision is always taken to replace the house with a kind of replica; but the costing method obscures the underlying pattern that arises when houses are replaced not because of fire but because of dissatisfaction or obsolescence when the land-use is sub-optimal.</p>
<p>Because the suburbs were built on a sparse footprint, the existing stock is too low and sits on the land in the wrong place, often plonked in the middle of a quarter acre and seldom more than a storey or two high. As this footprint is proving unsustainable in every sense — and the signs of greater density are springing up on this corner or that — you could conjecture that few free-standing houses in Zone 1 Melbourne or counterparts in Sydney and Brisbane will escape demolition within a century.</p>
<p>Looked at historically, Australian development is hesitant and apologetic. We start with a single dwelling in the middle of a block. To fit more people on the allotment, we build a granny flat. Then we demolish both dwellings and erect three or four units. Then we look around for something else to knock down to build a couple more, but always apologetic low-rise, with shy footprint with setbacks and tentative profile, and still with poor prospects for longevity.</p>
<p>Slowly, we make the city denser; but stepwise, by short-term increments that have an expiry date like a mouldy cheese. At each stage, a lot of money is committed toward nothing for posterity, because our traditions have made us resistant to optimal land-use. No domestic construction conforming to existing setback rules is safe from demolition as demand for accommodation mounts and a replacement is indicated.</p>
<p>Ambitious home-owners go in for renovations, paying half the value of the property to achieve a new extension or new service areas. It might delight a family to have a larger kitchen or a bedroom in the roof. The problem is that the house is in the wrong place and would need another four storeys on top of it to be sustainable in a contemporary metropolis.</p>
<p>Australia puts so much money into obsolescent development based on tiny capital and tinier regulatory vision. Suburbia has long been recognised by critics as an ecological disaster, but much less attention has been paid to suburbia as an economic disaster. </p>
<p>We might ponder how the low-density suburbs damage the environment, first by instituting the least energy-efficient detached housing and second by forcing people into cars on our now strangled roads, which fill the air with carbon. But what is never contemplated is how the low-density pattern also has the effect of sucking Australian capital into a vacuum.</p>
<p><em>This is an extract of Robert Nelson’s latest book “<a href="http://www.planning.org.au/documents/item/3512">The space wasters: the architecture of Australian misanthropy</a>”, published by the Planning Institute of Australia, 2011.</em></p><img src="https://counter.theconversation.com/content/4792/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Nelson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In spite of what everyone believes through natural pride and vanity, the family house is an asset that depreciates. Don’t be deceived that the value of property goes up and up, which of course it does…Robert Nelson, Associate Director Student Experience, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/47232011-12-21T19:45:13Z2011-12-21T19:45:13ZDoes Australia have the fundamentals to cope with our property prices?<figure><img src="https://images.theconversation.com/files/6635/original/9rr87wtk-1324360492.jpg?ixlib=rb-1.1.0&rect=35%2C22%2C953%2C612&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Our property prices are propped up by a range of political, economic and even emotional reasons.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Phillip Dare from Deakin University argues there are myriad reasons why Australia’s property prices remain high and that our fundamentals can sustain them.</strong></em> </p>
<p>Is it axiomatic, if there is property price bubble, that the bubble bursts?</p>
<p>Really, the question is not whether Australia have a housing price bubble, but what fundamentals are in place that might sustain our housing prices.</p>
<p>Australians and the Australian media seem to have an intertwined fascination with property values and price bubbles - arguably one feeds off the other. Much has been written on Australian property values recently from different perspectives, with the most extreme a claim by visiting US forecaster <a href="http://www.theage.com.au/money/investing/deflating-speculation-on-the-property-bubble-20110917-1kepn.html">Harry Dent</a> that Australian property prices “will drop 50% maybe”. In the same article chief economist at AMP Capital Investors Shane Oliver is quoted as saying Australian property is “way overvalued” by as much as “25%”. The Economist magazine has also recently claimed Australian house prices could “plunge by as much as 25% as a result of European defaults”. </p>
<p>It is not the purview of this article to debunk these all-encompassing claim; but I do believe Dent’s claim of a 50% price drop is a gross generalisation. </p>
<p>Firstly, a little perspective: Australia is a big country, without shared borders with neighbouring economic powerhouses - or economic basket cases that might impact our population bases or locational living choices. </p>
<p>Our population flows remain largely static, but we basically follow jobs, usually Victoria to Queensland and back in the other direction. We are similar in area to continental Europe and the United States, but with a population barely 10% of those geopolitical entities. The majority of Australians live within the major urban hubs of each state, with most living along the eastern seaboard.</p>
<p>Contrary to the economic woes being experienced by Europe and even the US, our economy is chugging along nicely, keeping us out of recession with a tight fiscal regime, low public debt and a central bank with a flexible monetary policy that concentrates on taming inflation and achieving low rates of unemployment. </p>
<p>So it could be argued that compared to markets such as the UK, US and Ireland where prices have been in free-fall, Australian property prices may well look as if being overpriced simply because they have not receded in such precipitous levels. </p>
<p>These falls are inextricably linked to the catastrophic failures in the North Atlantic and European banking systems, while Australia has a robust banking system with strong prudential regulation. Thanks to this, we have not been burdened with a US-style sub-prime property disaster which figured so prominently in the 2008 global financial crisis. </p>
<p>But is this all that has kept Australian property prices from plummeting? Consider the following other factors supporting property prices:</p>
<ul>
<li>Negative gearing. The tax system favours investor borrowers to write-off interest against personal income</li>
<li>50% reduction in CGT payable. Property kept for one year attracts 50% less tax then when the system was first introduced. </li>
<li>Profit on PPR non-taxable. Australians don’t pay tax on profit realised from when their principal place of residence is sold.</li>
<li>No estate duties/death taxes. Death duties were abolished decades ago, with the result that significant amounts of value are transferred inter-generationally without attracting any tax.</li>
<li>Land banking. Major builders and developers have bought large tracts of development land and holding for controlled release.</li>
<li>Land Zoning. Rezoning of undeveloped land to development potential is costly, slow and at times politically motivated.</li>
<li>Falling stock levels. Not enough new housing stock is being build to sate demand (such as new household formations and immigration)</li>
<li>Supporting housing values as an election strategy, such as the first home owner scheme. Propping up hose prices was strategically used by previous governments for electoral purposes.</li>
<li>Changes in foreign investment rules has seen prices in some areas being sustained.</li>
<li>Speculative wealth generation schemes. Regular spruiking in the daily newspapers of get-rich fast with property seminars/schemes. </li>
<li>Weakening of Loan to Valuation Ratios (LVRs) from 80% to 95% and 100%. Banking deregulation has seen housing finance freed from the shackles and once onerous (and at times ridiculous) lending guidelines.<br></li>
</ul>
<p>Finally, just a couple of observations from my real estate selling days on these other points.</p>
<p>When I started selling real estate in the northern suburbs of Melbourne in 1977 housing finance was hard to come by, unless buyers had established banking histories maintained over long periods of time.</p>
<p>Banks would not approve a loan under 30 days, or settle in under 60 days – preferring 90 days - nor would they consider an LVR greater than 75% to 80%, with borrowers requiring proof of savings for the remainder including stamp duty and legal fees (though these fees could be saved in the 90-day settlement period). </p>
<p>Only a third of a wife’s income would be considered in loan calculations and income from working a second job was not considered at all, and a single employed woman would struggle to get finance at all. How things have since changed.</p>
<p>In 1984 Prime Minister Bob Hawke and Treasurer Paul Keating introduced a first homeownership scheme: a maximum of about $3500 – half as a lump sum and half paid over a number of months. This only fed into the bottom line on house prices and did nothing to reduce the amount of borrowings for first home buyers. Much the same happened in 2001 when John Howard and Peter Costello introduced their $25,000 first homeowner scheme; that is, housing prices were supported with these grants, with an eye on the politics, but dressed up as economic policy. </p>
<p>My final anecdote from my real estate days relates to bricks and mortar. While share ownership has increased with individual investors in recent years in Australia, my experience with mums-and-dad investors is they like the touchy-feely nature of residential real estate as investment vehicles. </p>
<p>They can drive by and keep an eye on the tenant and they like the very tangible aspect of the bricks and mortar, as opposed to the share certificate that sits hidden away in a draw somewhere. And perhaps this emotional connection provides the greatest clue.</p>
<p>This is the seventh article in the Safe as Houses series. Read the other instalments here:</p>
<ul>
<li><strong>Part one:</strong> <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Why falling house prices aren’t the calamity the media would have you believe</a><br></li>
<li><strong>Part two:</strong> <a href="https://theconversation.com/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488">Debunking the myths peddled by Australia’s property bubble “deniers”</a></li>
<li><strong>Part three:</strong> <a href="https://theconversation.com/as-the-occupy-movement-targets-housing-what-can-we-learn-here-4724">As the Occupy movement targets housing, what can we learn here?</a></li>
<li><strong>Part four:</strong> <a href="https://theconversation.com/a-house-for-half-the-cost-heres-how-4676">A house for half the cost? Here’s how</a></li>
<li><strong>Part five:</strong> <a href="https://theconversation.com/its-time-for-a-fundamental-rethink-of-how-we-buy-and-sell-property-4626">It’s time for a fundamental rethink of how we buy and sell property</a></li>
<li><strong>Part six:</strong> <a href="https://theconversation.com/what-has-happened-to-the-great-aussie-backyard-4506">What has happened to the great Aussie backyard?</a></li>
</ul><img src="https://counter.theconversation.com/content/4723/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phillip Dare does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Phillip Dare, Lecturer, Property and Real Estate, School of Management and Marketing, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/45062011-12-20T19:28:15Z2011-12-20T19:28:15ZWhat has happened to the great Aussie backyard?<figure><img src="https://images.theconversation.com/files/6306/original/sfd7vvgt-1323648955.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bigger houses (on the left) - not smaller lots - are killing the Aussie backyard.</span> <span class="attribution"><span class="source">Tony Hall</span></span></figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Despite our professed love of the backyard barbecue, our outdoor space is shrinking as homes grow ever larger. Adjunct Professor Tony Hall at Griffith University’s urban research program asks, just what is Australia’s love of property doing to our environment?</strong></em></p>
<p>It is not often that a substantial change in urban form occurring throughout a modern country can be observed in less than a decade. Nevertheless, this is what happened in suburban Australia during the 1990s. </p>
<p>Up until the end of the 1980s, nearly all suburban houses in Australia had (by world standards) large backyards. </p>
<p>Homes in older suburbs are characterised by backyards of at least 150m², and they are commonly several times this figure. The house generally covers 20-30% (maximum 40%) of the plot. Backyards generally have a useful shape and significant coverage of trees. </p>
<p>In the early 1990s, there was a dramatic change in Australian suburban form. During this period, the provision of large backyards in new construction ceased. The 40% figure now represents the minimum, rather than the maximum, plot coverage. </p>
<p>Although some properties may have backyards of 100m² in area they are normally much smaller than this and are often less than 50m². Thanks to the narrow gap between the dwelling and the side and rear boundaries of the plot, the backyard is often a thin strip rather than a more useful square shape. </p>
<p>This change has not been subtle or gradual. Two distinct patterns of form are immediately apparent from even a cursory examination of aerial photographs. The older areas are characterised by open yards and tree cover while, in the newer ones, dwellings can be nearly roof-to-roof.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=198&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=198&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=198&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=249&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=249&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6307/original/t8ktmqpm-1323649048.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=249&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Newer houses have less natural light and ventilation, so need to use more electricity.</span>
<span class="attribution"><span class="source">Tony Hall</span></span>
</figcaption>
</figure>
<p>This change is not something that relates to the backyards alone. House and street design have also changed as part of the same process. </p>
<p>There has been a trend towards deep, square house plans made up of large internal spaces with little natural light and ventilation. There is also a trend towards fewer and smaller windows. The narrow gap around single-storey houses is dominated by high, opaque fences. The front is dominated by built-in garages.</p>
<p>Many people think this trend is the result of smaller plot sizes. While it’s true there is a trend to smaller plot sizes in Australia, a closer examination of the data reveals this is not the cause of the phenomenon. The evidence suggests it is the increase in the dwelling area, rather than the decrease in the plot area, that has been driving the shrinkage of the backyard. </p>
<p>There is no evidence that it has been brought about directly by policies of urban consolidation. The phenomenon is found at all plot sizes. Most significantly, it is to be found in lower-density outer suburbs located a considerable distance from city centres. </p>
<p>Local policies and planning regulations have not explicitly required small backyards. However, those policy and planning regulations have not prevented the shrinking of private open space. Requirements for gaps to the sides and rear of properties are generally 1-2m and, where they exist, minimum standards for private open space are tiny compared to the areas of the pre-1990 backyards.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6309/original/nhj7ppdj-1323649209.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Old-fashioned backyards encouraged biodiversity and a cooler microclimate.</span>
<span class="attribution"><span class="source">Jeff Mead</span></span>
</figcaption>
</figure>
<p>Why is this a problem? Smaller backyards reduce the amenity of the property, both by reducing the outlook from the dwelling and cutting back facilities for outdoor recreation around the home, especially for young children. </p>
<p>But the disadvantages go way beyond the lifestyles of the occupants. The reduction in vegetation, especially tree cover, around the dwelling has led to a loss of biodiversity and an increase in run-off of storm water. The microclimate becomes hotter: this requires more air-conditioning and increased energy use. </p>
<p>This is a permanent change in built form that cannot be corrected later.</p>
<p>Why are people choosing to live in such houses? Data on Australian social trends suggests the reduction in backyard size has coincided exactly with a trend to substantially longer working hours amongst middle and higher income office workers. </p>
<p>At the same time, the growth in the use of air-conditioning has not only allowed, but also encouraged, an indoor lifestyle. </p>
<p>For people buying a suburban house, the focus has become one of investment in buildings. A particular house form that maximises floor area at minimum cost has evolved in response. Little priority is now given to planted space around the house, as it is not seen as an investment. The dwelling is therefore extended over as much of the plot as is permitted. </p>
<p>These last points remain, for the moment, hypotheses. But the questions they raise about housing density, life-style and climate cannot be ignored.</p>
<p><strong>This is the sixth article in the Safe as Houses series. Read the other instalments here:</strong> </p>
<ul>
<li><strong>Part one:</strong> <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Why falling house prices aren’t the calamity the media would have you believe</a><br></li>
<li><strong>Part two:</strong> <a href="https://theconversation.com/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488">Debunking the myths peddled by Australia’s property bubble “deniers”</a></li>
<li><strong>Part three:</strong> <a href="https://theconversation.com/as-the-occupy-movement-targets-housing-what-can-we-learn-here-4724">As the Occupy movement targets housing, what can we learn here?</a></li>
<li><strong>Part four:</strong> <a href="https://theconversation.com/a-house-for-half-the-cost-heres-how-4676">A house for half the cost? Here’s how</a></li>
<li><strong>Part five:</strong> <a href="https://theconversation.com/its-time-for-a-fundamental-rethink-of-how-we-buy-and-sell-property-4626">It’s time for a fundamental rethink of how we buy and sell property </a></li>
</ul><img src="https://counter.theconversation.com/content/4506/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Hall does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Tony Hall, Adjunct Professor, Urban Research Program, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/46262011-12-20T03:06:08Z2011-12-20T03:06:08ZIt’s time for a fundamental rethink of how we buy and sell property<figure><img src="https://images.theconversation.com/files/6590/original/f3j2xnfk-1324342955.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why does investing in homes carry so much risk?</span> </figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Today, University of Cambridge Professor of Geography Susan Smith explains how the property market carries unnecessary risk for home buyers – risk that could be avoided through the use of prudent financial innovation.</strong></em></p>
<p>The idea of financial innovation around housing is generally viewed with disdain these days. After all, it sparked a major economic crisis, and is seen as a cause of, rather than a solution for, the problems of the world economy.</p>
<p>But the truth is that housing markets are financially quite conservative. There is nothing very innovative about the way that homes are traded, for example. And that in itself is problematic. </p>
<p>Even now, we do not understand the beliefs and behaviours that drive home prices. Indeed, there is a lot we do know about the equity side of the housing equation. As a result, ordinary home buyers have far too much resting on the investment return on their property. They tend to hold all nearly of their wealth in a single and unusual investment vehicle, which is neither sensible nor useful, and can be extremely risky.</p>
<p>Mortgage markets have attracted more attention. But even mortgages, at root, have changed rather little over the years, despite all the bells and whistles attached to modern products. To be sure, there have been myriad novel features built into mortgage contracts – including an array of options for people to borrow more as home prices rise. But these are just embellishments on the basic self-amortising loan, linked to nominal interest rates. </p>
<p>One consequence of this underlying inertia is that there is far too little risk-sharing built into mortgages. There are all kinds of future uncertainties whose risks are not shared in these instruments, and this is especially problematic, in my view, in relation to home price volatility. Some people say such volatility doesn’t matter when people move home so infrequently and usually go on to buy somewhere else. But it does matter if housing wealth is your asset-base for welfare, and it matters even more if that wealth could do better in a different investment vehicle.</p>
<p>In short, financial innovation is limited in some key elements of the housing economy. The really big 21st century innovation occurred instead in financial markets, and even here key initiatives centred on massively increasing the supply of credit, rather than on managing the housing economy as a whole. Mortgaged-backed securities and mortgage-heavy collateralised debt obligations, for example, were used to raise money from investors and this in turn created a wave of credit that was channeled back to a growing pool of ever more marginalised borrowers. The rest as they say is history – and a sorry tale it turned out to be.</p>
<p>The very odd thing here is that financial markets proved so disinterested in instruments designed to spread the the risks and share the gains of housing assets – even though mortgage debt is, of course, anchored on them. This neglect compounded the problems that the oversupply of credit helped create and it makes me wonder whether, despite the problems caused by innovations in financial markets in the past (by over-complex, unjustly opaque and poorly regulated financial engineering) a fairer housing future may in the end depend on having more innovation, not less.</p>
<p>For example, I would be interested to see banks take seriously the idea of mortgages that not only share interest rate risks between lenders and borrowers, but also share price, or investment risks. I would also be keen to give people the option to reduce their housing costs by not buying the whole of the investment vehicle linked to their property. </p>
<p>After all, when you pay $400,000 for a home, the housing services component (the cost of enjoying the accommodation it confers) might only be worth, say, $350,000. The remainder – say $50,000 – is something that, as an owner occupier you are forced to put into an investment vehicle whose performance depends on the fortunes one little plot in the corner of a single neighbourhood. That’s risky, and I think it is unnecessary. </p>
<p>To change things for the better, I would like to see a housing system where owner occupation as we know it is broken apart. That is, instead of having to tie my bundle of housing services to the lumpy idiosyncratic savings vehicle attached to it, I would like to keep my choice of accommodation separate from decisions about my wealth portfolio. I can’t do this, and neither can anyone else, without another round of financial engineering. Whether we dare go there – whether markets can be reformed and regulated sufficiently for us even to consider it – is more a matter for governments and policy makers than for financial engineers and investors.</p>
<p><strong>This is the fifth article in the Safe as Houses series. Read the other instalments here:</strong> </p>
<ul>
<li><strong>Part one:</strong> <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Why falling house prices aren’t the calamity the media would have you believe</a><br></li>
<li><strong>Part two:</strong> <a href="https://theconversation.com/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488">Debunking the myths peddled by Australia’s property bubble “deniers”</a></li>
<li><strong>Part three:</strong> <a href="https://theconversation.com/as-the-occupy-movement-targets-housing-what-can-we-learn-here-4724">As the Occupy movement targets housing, what can we learn here?</a></li>
<li><strong>Part four:</strong> <a href="https://theconversation.com/a-house-for-half-the-cost-heres-how-4676">A house for half the cost? Here’s how</a></li>
</ul><img src="https://counter.theconversation.com/content/4626/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Professor Susan Smith was the keynote speaker for the "Housing finance after the GFC" research seminar, co-hosted by RMIT University and the Australian Housing and Urban Research Institute, held in December 7.
</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Susan Smith, Honorary Professor of Geography, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/46762011-12-15T19:34:51Z2011-12-15T19:34:51ZA house for half the cost? Here’s how<figure><img src="https://images.theconversation.com/files/6477/original/6tmkshdh-1323927125.jpg?ixlib=rb-1.1.0&rect=18%2C3%2C984%2C659&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Reducing the finance costs of housing will also reduce house prices.</span> <span class="attribution"><span class="source">Flickr/kennymatic</span></span></figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Along with <a href="http://www.smh.com.au/afl/afl-news/fevola-eyes-state-league-and-book-deal-20111213-1ot6p.html">poorly behaved sporting figures</a>, <a href="http://www.news.com.au/entertainment/celebrity/ill-be-back-vile-kyle-sandilands-to-return-in-2012-after-journo-threat/story-e6frfmqi-1226218401635">Kyle Sandilands</a>, and <a href="http://www.heraldsun.com.au/news/more-news/police-busted-bashing-hoon-driver-in-mansfield/story-fn7x8me2-1226222314621">casual police brutality</a>, crushingly large mortgages are basically accepted as an unpleasant fact of life.</strong></em></p>
<p><strong><em>But what if we could change the way we repaid our loans to pay less interest and enjoy improved home affordability? Adjunct Associate Professor at the University of Canberra, Kevin Cox explains how.</em></strong></p>
<p>In The Conversation this week, <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Keith Jacobs</a> argues that falling house prices would lead to positive outcomes for the Australian economy. Here I propose a way to reduce the cost of housing that will, over time, also reduce house prices.</p>
<p>A reason for unaffordable housing is that the finance costs of purchasing a house with a loan is at least twice as much as it needs to be. Reducing the cost of finance will reduce the total cost of purchasing a house. This will, in turn, reduce the pressure on house prices as it will reduce the financial profitability of traditional housing loans and direct finance to other more productive and profitable uses.</p>
<p>Most loans are used to transfer control of an asset from one person to another. The person receiving the loan agrees to pay rent for the use of the asset while ever they have the use of the asset. When they relinquish control of the asset they no longer pay rent on the asset. Let us assume the asset is a fleet of five cars. A borrower rents five motor cars and so pays rent on five cars. If they return one car they pay rent on the four remaining cars and they do not pay rent on the returned car.</p>
<p>Money loans work differently. Let us assume that the rent on five units of money is one unit of money. If one unit of money is returned then rent is continued to be paid on five units of money - not four. We treat money loans differently from other asset loans because we create money with an interest coupon attached at the time of creation. This gives money a value over time by the way it was created. Money when it is saved should have an interest coupon attached. Money when it is created should not have an interest coupon attached.</p>
<p>Most people think banks take in deposits and lend the deposits. Unfortunately this is not the way the system works. When a bank gives a loan the bank creates new money to lend. This money is deposited in the borrower’s account. There was no deposit lent or money saved - instead the bank created money and deposited it. This newly created money immediately attracts interest. This is the underlying reason why, in the above example, rent continues to be paid on five units not four because banks have to pay interest on newly created money. </p>
<p>Because we create money with an interest coupon and because interest itself attracts interest then the amount of money needed to keep the system operating compounds. In the ancient world the Sumerians, Babylonians, Jews and Romans understood the unsustainable nature of debt and periodically they had a debt jubilee to remove the excess debt. Muslims and Christians tried to solve the problem by banning interest.</p>
<p>There is another solution. We can change the rules on how to repay loans. We continue to pay rent (interest) on money but pay no interest on accumulated interest. </p>
<p>Using existing loan repayment rules, if we have a loan of $100,000 with a yearly interest rate of 20% and we repay $20,000 each year then the loan is never repaid. Each year the $20,000 repayment does not reduce the capital on which interest is paid and it means we pay interest on the money that has been repaid. The new proposed rules of repayment are for repayments to come off the principal and no interest is to be charged on unpaid interest. </p>
<p>At the end of the first year, with these new rules, the borrower still owes $100,000 but the amount of money on which interest is paid in the next year is $80,000. This means that at the end of the second year the amount owed is $96,000. Each year the amount owed will reduce until finally the debt is repaid. With both sets of rules the same amount has been paid so the economic outcomes are the same. The difference is that the new rules extinguish the debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=329&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=329&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=329&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=413&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=413&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6480/original/pbs3fjck-1323927907.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=413&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Supplied by Kevin Cox</span></span>
</figcaption>
</figure>
<p>This simple change to repayment rules could make a dramatic change in the cost of capital goods financed through loans. For example, the interest charges on a home loan of $500K at 7% over 30 years is about $611,000 while the total interest charges on a loan with revised rules with the same size repayments is $225,000.</p>
<p>If the approach is adopted it will mean that housing in Australia will become affordable without a collapse in house prices.</p>
<p>In systems terms the positive feedback mechanism of interest on interest has been removed. In most systems positive feedback almost always leads to instability. Removing mechanisms that cause positive feedback means the system has a better chance of stabilising. What this means for house prices is that the inflationary pressures will be reduced.</p>
<p>For banks, it means they will find it more profitable to lend existing deposits for housing rather than create new deposits with new money. However, money still needs to be created so banks will have deposits to lend. (I describe one way to do this in a <a href="https://theconversation.com/want-to-end-the-gfc-put-debt-to-good-use-3963">previous article</a>. ) </p>
<p>In summary, the issuing of credit through the creation of interest bearing money leads to a compounding of debt, which unnecessarily increases the cost of credit. </p>
<p>By changing loan repayment rules, the cost of credit is reduced which reduces the cost to transfer capital assets to the benefit of both the buyer and seller.</p>
<p><strong>This is the fourth article in the Safe as Houses series. Read the other instalments here:</strong> </p>
<ul>
<li><strong>Part one:</strong> <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Why falling house prices aren’t the calamity the media would have you believe</a><br></li>
<li><strong>Part two:</strong> <a href="https://theconversation.com/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488">Debunking the myths peddled by Australia’s property bubble “deniers”</a></li>
<li><strong>Part three:</strong> <a href="https://theconversation.com/as-the-occupy-movement-targets-housing-what-can-we-learn-here-4724">As the Occupy movement targets housing, what can we learn here?</a></li>
</ul><img src="https://counter.theconversation.com/content/4676/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Cox has recently founded a company to build an IT system to administer loans using the repayment rules outlined in this article.</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Kevin Cox, Adjunct Associate Professor, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/47242011-12-14T19:39:41Z2011-12-14T19:39:41ZAs the Occupy movement targets housing, what can we learn here?<figure><img src="https://images.theconversation.com/files/6386/original/9rg7xrz9-1323757241.jpg?ixlib=rb-1.1.0&rect=50%2C25%2C916%2C688&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The US Occupy movement has turned its attention from corporate greed to the housing market.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Today, Professor Frank Stilwell in the Department of Political Economy at the University of Sydney writes on a fascinating new direction for the Occupy protest movement and what Australia might learn.</strong></em></p>
<p>An interesting spin-off has recently emerged from Occupy Wall Street movement in the United States. Born from the activism of demonstrators protesting against corporate greed and economic inequality, the <a href="http://occupyourhomes.org/">Occupy Our Homes</a> campaign aims to <a href="http://www.guardian.co.uk/world/2011/dec/07/occupy-our-homes-families-foreclosure?newsfeed=true">open foreclosed homes</a> to struggling US families.</p>
<p>According to its activists, thousands of homes have been left to sit vacant as banks foreclose on the mortgages of aspiring house-buyers with low to middle incomes. Meanwhile, more wealthy citizens own more and bigger houses than they could ever possibly need for their personal use.</p>
<p>That the Occupy Movement should turn its attention to housing makes sense. The global financial crisis had its origin in US housing markets with unsustainable “sub-prime” mortgages leading to cumulative instability in related financial markets. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6390/original/8y5hrkb4-1323759197.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Foreclosure signs are a feature of the US property market.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Avoiding similar problems in the future requires more equitable and sustainable housing arrangements. And more generally, creating a good society requires commitment to better housing policies, along with improved employment opportunities and the redistribution of economic power and incomes.</p>
<p>Does this apply equally in Australia? Yes, it does. Major stresses and inequalities in our society originate from the housing arrangements, while the housing arrangements also cumulatively accentuate the stresses and inequalities. The basic problem is that housing is being used as a means of accumulating capital. Wealthy people invest in housing whenever the expected rate of house price inflation exceeds that of other assets. Sometimes people with relatively modest incomes get drawn into the process too, thinking that owning an investment property or two will be a reliable source of future income in an otherwise uncertain economic environment. </p>
<p>The speculative demand for housing drives up market prices. This accentuates the problem of housing affordability. Some people are left homeless as a result. Others struggle on in privately rented housing, where the incidence of “housing stress” (officially defined as where the rent exceeds 30% of household income) is the highest of all housing sectors. </p>
<p>Concurrently, among the nearly 70% of Australian households who are owner-occupiers are many whose mortgage payment commitments take them right up against their capacity to cope. No wonder so many Australians are nervous about the changes in the official interest rates that the Reserve Bank periodically announces, and the willingness of the Big Four banks to adjust their mortgage rates in tandem with the Reserve Bank of Australia’s cash rate.</p>
<p>“Decent and affordable housing for all” should be an achievable goal in an affluent society like Australia. What impedes it, fundamentally, are two major socio-economic problems – economic inequality and the arrangements for land use.</p>
<p>Economic inequality is an obvious reason for the imbalances in access to home ownership and housing capital appreciation. It creates a divide between housing winners and losers. A <a href="http://www.oecd.org/document/40/0,3746,en_21571361_44315115_49166760_1_1_1_1,00.html">OECD report</a> released last week shows that Australia is one of the countries where the polarity between rich and poor is becoming increasingly pronounced. </p>
<p>The richest 1% of Australians doubled their share of total national income over the period from 1980 to 2008 (when the global financial crisis began) – rising from 4.8% to 8.8%. Over the same period, the top marginal income tax rates fell sharply – from 60% in 1980 to 45% in 2010. So the rich got a lot richer, and much of the increase went into increased housing asset values.</p>
<p>The OECD report also shows that the earnings gap between the 10% best paid workers and the lowest paid workers also increased by a fifth over the 1980-2008 period. The last couple of decades in particular have seen a growing proportion of households depending on casual, part-time or short-term contract employment. The resulting economic insecurity makes a broad swathe of the Australian population less able to make the ongoing commitment to investing in home-ownership, unless they have strong support from wealthy parents or get a fortuitous housing inheritance. </p>
<p>The economic inequalities are reflected in uneven housing markets nationwide. Of course, there have long been inequalities between city and country prices and between housing in desirable and less desirable neighborhoods within the metropolitan areas. What we’re now seeing is a patchwork housing situation that mirrors the much-discussed “patchwork economy”. </p>
<p>Housing prices continue to surge in regions where the mining industry is buoyant, for example - but the reverse applies in localities where older manufacturing industries have been in decline. The economic inequalities – both between social groups and regions – are a major factor in the growing divide between housing winners and losers.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6397/original/kj8rvkzd-1323760705.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The growing divide between housing winners and losers.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>The other fundamental problem is a lack of coherent policy towards land in Australia. Land values are the major component in housing prices. What causes a house in, say, Sydney’s Vaucluse to have a market price maybe six times that of an equivalent house in the outer western suburbs? It has little to do with the price of the bricks, mortar and other manufactured components in the houses themselves, because these are similar from place to place. Rather, the differences arise from the market prices of the land on which the houses stand. It follows that any policy to make housing access more affordable and equitable must address this issue of land ownership and land values.</p>
<p>Current land policies are inadequate for this purpose. They facilitate speculation in land markets, allowing private landowners to reap the fruits of rising land values. The rising values result from societal processes, such as further urbanization that drives up the prevailing price of land. </p>
<p>Land in the desirable locations is also continually rising in price because it is a “positional good” which, being limited in supply, can never be accessed by all who aspire to do so. Meanwhile, on the urban fringes in particular, windfall gains to landowners recurrently result from decisions by local authorities to change permitted land-uses, for example, from farming to residential and commercial. No wonder land is so commonly seen as an avenue for capital accumulation. Indeed, it is little wonder that the term “the land racket” recurs commonly in discussions about land in Australia.</p>
<p>These pervasive problems arising from the lack of coherent land policies were recognised over a century ago by the American political economist<a href="http://hgfa.org.au/who-was-henry-george"> Henry George</a>. Drawing on his observation of contemporary socio-economic trends as well as classical political economic theory, George argued that a comprehensive system of land taxation would drive the speculative element out of land markets. The uniform land tax – or capture of site rents – could therefore reduce land and housing prices, creating more economic and social equality and reducing poverty. Perhaps it is timely to look again at these fundamentally important ideas.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=902&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=902&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=902&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1133&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1133&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6398/original/h33cv54c-1323760934.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1133&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Ken Henry review suggested solutions to housing inequality.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Another Henry – Ken Henry, the former head of the Australian Treasury – who was responsible for the major review of our tax system, has also pointed to the beneficial economic effects that would result from a shift to more comprehensive land tax. Participants at this year’s national <a href="https://theconversation.com/search?q=tax+forum">Tax Forum</a> agreed that a more broadly-based land tax would ease the financial situation of local and state governments, and that other taxes could be lowered as a result. The outcome would then be more reward for personal effort and productive effort, rather than perpetuating a situation whereby landowners capture much of the nation’s economic surplus as unearned income. The beneficiaries from this policy shift would include people currently struggling to put a roof over their heads without incurring a lifetime of excessive debt.</p>
<p>The Occupy Movement worldwide has raised fundamental questions about why the current economic arrangements fail to serve society as a whole. It has shone the spotlight on the concentration of corporate power, the irresponsibility of big financial institutions and the growing economic inequalities. By turning attention to housing issues, it is also making a valuable contribution to public debate on fundamental concerns about how to achieve decent, affordable housing for all.</p>
<p><strong>This is the third article in the Safe as Houses series. Read the other instalments here:</strong> </p>
<ul>
<li><strong>Part one:</strong> <a href="https://theconversation.com/why-falling-house-prices-arent-the-calamity-the-media-would-have-you-believe-4547">Why falling house prices aren’t the calamity the media would have you believe</a><br></li>
<li><strong>Part two:</strong> <a href="https://theconversation.com/debunking-the-myths-peddled-by-australias-property-bubble-deniers-4488">Debunking the myths peddled by Australia’s property bubble “deniers”</a></li>
</ul><img src="https://counter.theconversation.com/content/4724/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>no conflict of interests exists in this case</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Frank Stilwell, Professor, Department of Political Economy, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/44882011-12-13T19:39:53Z2011-12-13T19:39:53ZDebunking the myths peddled by Australia’s property bubble ‘deniers’<figure><img src="https://images.theconversation.com/files/6354/original/3bj2yzhw-1323746653.jpg?ixlib=rb-1.1.0&rect=30%2C15%2C974%2C735&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Buyers' playtime: Australians have splurged on mortgage debt.</span> <span class="attribution"><span class="source">Flickr/Bill Ward's brickpile</span></span></figcaption></figure><p><em><strong>Our Safe as Houses series delves into a topic close to the heart of many Australians - property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>It’s one of the mostly hotly debated topics surrounding property: do Australia’s high residential prices constitute a bubble? Yes, says Phillip Soos, researcher at Deakin University’s School of International and Political Studies, tackling what he says are the four most popular arguments used by “bubble deniers”.</strong></em></p>
<p>For over half a decade in Australia, a fierce debate has occurred over whether a bubble exists in the housing market. The vast majority of experts, institutions and the public believe that the idea of a bubble is nonsense. On the other side of the coin, a handful of individuals have contested this notion, pointing out the flaws in the bubble deniers’ line of thinking.</p>
<p>We will look over some of the common arguments made by the bubble deniers, to see how they stack up with the facts.</p>
<h2>Recourse lending</h2>
<p>One of the major arguments made by experts and industry is that a housing bubble cannot exist because mortgages are recourse in Australia, rather than non-recourse. This means that borrowers are liable for the full amount of the mortgage, whereas non-recourse means that borrowers have no legal liability to pay back the mortgage if they default.</p>
<p>This is often compared to the United States, which is alleged to have non-recourse loans. This line of thinking asserts that borrowers took upon irresponsible amounts of mortgage debt to speculate on housing, knowing that if they defaulted down the track, they would not be liable to pay back the full amount.</p>
<p>This has led to the popular term called “jingle mail,” referring to the notion of a defaulted borrower mailing back the keys to their lender, and walking away from the property. This typically occurs when the borrower is in a position of negative equity, that is, the property is now worth less than the loan. The lender thus makes a loss on their accounts, to the value of the difference between the loan and the current market value of the property.</p>
<p>As the argument goes, non-recourse lending in the US was a major factor in the run-up in housing prices, whereas Australia has recourse mortgages, and thus does not have irresponsible amounts of mortgage debt.</p>
<p>There is one small problem with this view: it is total nonsense.</p>
<p><a href="http://www.richmondfed.org/publications/research/working_papers/2009/wp_09-10R.cfm">A study by two Federal Reserve economists</a> debunks the notion that the US has non-recourse loans. Out of the fifty states and D.C., 11 are non-recourse. All of the remaining 39 states are recourse. On top of this, in some of the non-recourse states, the first mortgage many be non-recourse, but all proceeding mortgages are recourse. Also, it often depends on the legalities and judges’ decisions as to whether a borrower is required to pay back the full value of the loan in a non-recourse state.</p>
<p>Worse yet, some of the states that experienced the largest housing bubbles have recourse loans, for instance, Florida and Nevada, whereas California and Oregon, similarly affected, have non-recourse loans. Overall, there is no real difference between states that have recourse and non-recourse loans, apart from recourse borrowers who tend, on average, to hold onto their properties longer before defaulting.</p>
<p>Ireland experienced a colossal run-up in prices over the last decade, resulting in a crash and subsequent debt-deflation that has ruined the economy. What is not said is that Ireland has recourse mortgages, governed by strict rules, and non-payment may even result in imprisonment. Clearly, recourse mortgages did not prevent a bubble from forming in the housing market.</p>
<p>The idea that recourse mortgages enforce responsible and conservative behavior cannot be upheld. A cursory search through Google on this topic provides information that debunks this notion (like the above study). Yet, this has not stopped the leading “experts” within the RBA, Treasury, the banking and real estate industry, and academia from repeating this falsified argument again and again over the years.</p>
<h2>Housing prices always go up</h2>
<p>Another popular myth that abounds is that housing prices always go up and never crash. If a bubble denier reluctantly admits that past downturns did occur, it certainly won’t occur this time around.</p>
<p>Australia’s recorded housing price history, going back 131 years to 1880, easily debunks this myth. The nine major increases in prices have been met by eight resulting downturns, with the only exception during a small three year period from 1961-1964, where prices leveled off. The table below, from my <a href="http://www.prosper.org.au/2011/07/19/bubbling-over-the-end-of-australias-2-trillion-housing-party/">Prosper Australia report</a>, shows this.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=366&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=366&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6351/original/zw7js3nb-1323744216.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=366&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">History of housing price increases followed by downturns.</span>
<span class="attribution"><span class="source">Suppled </span></span>
</figcaption>
</figure>
<p>We are supposed to believe that the largest increase in housing prices in Australian history will not result in the same fate as eight of the nine have.</p>
<h2>The housing shortage</h2>
<p>This is probably the most popular argument used by the bubble deniers. The story is that as Australia is suffering from a chronic deficit of properties to shelter a growing population, so demand is greater than supply, leading to rising housing prices.</p>
<p>The problem with this argument is it can’t explain why prices started to rise in 1996 and skyrocketed from 2001 onwards. Annual population growth between 1996 and 2005 registered at approximately 1%, taking off between 1.5% and 2% from 2006 onwards. (Fundamental supply and demand issues explain rent prices, not housing prices, which is why rents have increased from 2006 onwards).</p>
<p>2007 was the first time since 1950 that the population increased faster than the number of dwellings. If the housing shortage argument was correct, housing prices should’ve started to rise from around 2006-2007 onwards, not 1996. The historical data shows that there is no correlation, let alone causation, between population growth, dwelling supply and housing prices.</p>
<p>According to the 2006 ABS census data, there were 830,376 unoccupied dwellings during the time the survey was taken, out of a total of 8,426,559, or 10% of the dwelling stock. Unfortunately, no indication is given to the status of the vacant properties (derelict, holiday house, undergoing sale, renovations, speculative vacancy).</p>
<p>The Melbourne-based organisation Prosper Australia performed an innovative study of vacant properties using water usage figures. Applying a conservative methodology, it was found that almost 45,000 properties were lying vacant in the areas under study, and extrapolated across Melbourne, 61,000 properties were lying vacant for more than six months. This gives credibility to the idea that speculators are withholding properties from the market to capture capital gains rather than rental income.</p>
<p>Australia’s peak housing body, the National Housing Supply Council, had to include the homeless, caravan park residents, those sleeping rough and couch surfers into their figures in order to arrive at an undersupply of dwellings.</p>
<p>This is reminiscent of every other country affected by a housing bubble whose experts and authorities claimed that rising housing prices were caused by a housing shortage.</p>
<h2>Australian banks have lent conservatively</h2>
<p>This is one of the more ludicrous defenses made by the bubble deniers. Our mortgage debt stands at $1.2 trillion, or 90% of GDP. If personal debt is included as well, as some analyses do, it totals 100% of GDP. A <a href="http://www.bis.org/publ/othp16.pdf">report by the Bank of International Settlements</a> shows that a ratio of and above 85% becomes damaging to the economy.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=279&fit=crop&dpr=1 600w, https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=279&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=279&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=350&fit=crop&dpr=1 754w, https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=350&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/6350/original/4st62q7g-1323744204.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=350&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Debt to GDP ratio.</span>
<span class="attribution"><span class="source">Supplied</span></span>
</figcaption>
</figure>
<p>That Australia has such a high ratio is unsurprising considering the major banks have lent up to 97% of the value of the property (called the loan to value ratio or LVR) and some non-banking lenders have lent out a staggering 125%. The housing debt to disposable income ratio has reached 160%.</p>
<p>Comparatively, Australia has a greater mortgage debt to GDP ratio than the US. Australians have taken upon an enormous debt load to speculate on housing prices. Why bother to work?</p>
<p>Australia is not unique in having a disbelief in the idea of a housing bubble. By definition, a bubble requires that complicity of the majority of people and institutions to believe that there is no bubble. Otherwise, individual rational action would be promptly taken, which would result in bursting the bubble in the early stages or preventing the formation of one altogether.</p>
<p>The only difference between Australia and other countries affected by housing bubbles is that bubble deniers are as plentiful as kangaroos down under.</p><img src="https://counter.theconversation.com/content/4488/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Our Safe as Houses series delves into a topic close to the heart of many Australians - property. This is not a series on where the market might be heading. Instead we aim to explore how we view property…Philip Soos, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/45472011-12-12T19:16:24Z2011-12-12T19:16:24ZWhy falling house prices aren’t the calamity the media would have you believe<figure><img src="https://images.theconversation.com/files/6332/original/ds4jnm8f-1323669540.jpg?ixlib=rb-1.1.0&rect=22%2C15%2C947%2C629&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Interest rates would appear to be a national obsession: but are we worrying too much?</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p><em><strong>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians - property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.</strong></em></p>
<p><em><strong>Judging by media reports, a great number of us are transfixed by interest rate changes and consumed with anxiety about falling house prices. But should we be? Today, Keith Jacobs from the University of Tasmania explores who the real losers are when prices fall.</strong></em></p>
<p>One of the most fascinating and enduring aspects of Australian politics is the cacophony of criticism directed at the federal government whenever house prices fall. The assumption made is that the value of property is a proxy for the state of the economy. </p>
<p>A fall in the value of property is therefore bad news and evidence that we stand to lose should prices continue to decline. We expect governments to put in place measures so that homeowners and investors can accrue wealth and buyers can return to the market. </p>
<p>Over the coming months, the cacophony of criticism is likely to intensify, as real estate, developer and property lobbyists demand extra government funds to boost housing market activity. According to the recent data published by RP Data-Rismark, the value of our homes has fallen by 4% in the last 12 months, with Canberra being the only capital city where prices have increased. In Brisbane there has been a 7.5% fall, while in Melbourne prices are down by 5.8%. </p>
<p>But is it really bad news if the value of homes starts to fall? Certainly, there are people who do stand to lose when prices decline, such as householders who plan to sell their home and move to a smaller or less expensive home and those planning to move abroad and need to sell their home. </p>
<p>Those who have the most to fear when house prices fall are mortgage lenders, the real estate companies and property developers. Their opportunities for generating profits are threatened by a slowdown in the housing market. </p>
<p>Yet there are many individuals who stand to benefit when prices fall, not least those who have been unable to gain a foothold in the owner-occupied market, householders who plan to trade-up to more expensive properties, newly arrived migrants who plan to buy and renters living in homes that might have otherwise be advertised for sale. </p>
<p>What is frequently overlooked is that any increase in the value of our homes accentuates an affordability crisis. In the last 20 years, Australian house prices have quadrupled in price, yet average earnings have failed to keep up, only increasing by two-fold over this period. </p>
<p>The cumulative impact of house price inflation has been considerable. It is estimated that there are as many as 1.25 million low-income households paying more than 30% of their income on housing related costs, that there are 250,000 people who have placed their names on public housing waiting lists and as many as 60,000 individuals who are homeless. The shortage of properties for let has enabled unscrupulous landlords to raise rents and many households have no choice but to live in homes that are in poor condition. </p>
<p>Yet the crisis of affordability and the conditions endured by many households is often sidelined because so much of the media reporting on housing issues is fixated on monthly changes in house prices in the suburbs of our capital cities. The barrage of house price data reported in media outlets serves to shift our gaze from the inequities that underpin the housing market and the stress endured by so many low-income Australians. </p>
<p>Why has this crisis of affordability not been addressed by government? A major reason is that powerful industry groupings such as the financial sectors, property developers and real estate lobby groups have been spectacularly successful in maintaining pressure on the policymakers to privilege wealthy homeowners at the expense of less well-off households. </p>
<p>Some <a href="http://www.bsl.org.au/pdfs/Yates_tax_expenditure_and_housing_2009.pdf">fascinating research</a> undertaken last year by Judy Yates of University of Sydney makes explicit how subsidy arrangements favour well-off homeowners. If we include inputted rent and capital gains that are not subject to taxation, total government expenditure on housing stands at just over $53 billion per year, most of which ($45 billion) is expended in the form tax relief for owner-occupiers and rental housing investors ($5 billion). </p>
<p>By contrast, those households living in rental accommodation are subsidised by $3.2 billion. For individual homeowners this subsidy amounts to around $8,000 per year, investors are subsidised by $4,000 while concessions to private renters amount to just $1300 per household and public housing tenants $1000 per year. </p>
<p>Recent analysis published by the Australian Bureau of Statistics estimates that the median net wealth of households who rent in 2009 was just $55,265 whilst householders who own their home but are paying off a mortgage had a median net wealth of $487,183. Those homeowners who own their property outright had a median net wealth of $737,394 – 13 times greater than the median wealth of those who rent.</p>
<p>It is an uncomfortable truth that government policies have been instrumental in maintaining housing inequality. The current taxation arrangements serve the interests of homeowners and rental investors, and politicians are reluctant to advocate reforms that might damage their electoral prospects. </p>
<p>Those in Australia who are fortunate enough to own their own home have become accustomed to believing the value of their home should rise and that the capital gains they accrue should be exempt from tax. The media in their role have largely failed to make explicit the societal implications of the current housing arrangements. </p>
<p>Our obsession with the value of our homes has, in effect, stymied the scope for a more critical coverage of the politics of housing to shed light on how resources have been distributed to those who are well housed at the expense of those who are experiencing housing stress.</p><img src="https://counter.theconversation.com/content/4547/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Jacobs receives funding from 'The Australian Housing and Urban Research Institute' (AHURI).</span></em></p>Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians - property. This is not a series on where the market might be heading. Instead we aim to explore how we view…Keith Jacobs, Future Fellow - Australian Research Council , University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.