I listened in to this presentation today, organized by The Australia Institute, a progressive think-tank. It featured financial commentator Alan Kohler introducing and taking questions on his recent piece in the Australian Quarterly Essay.

While I still have to lay my hand on the issue, today’s talk along with this Guardian extract gives you the gist of what Kohler’s arguments are. I wanted to jot down some notes from the talk, and add some of my thoughts that have been accumulating over the past two years.

Essentially, the Great Divide is the big and growing gap between those who own a house vs. those who don’t.

With almost two thirds of Australian households owning their home outright or via a mortgage, there is very little political pressure to address the issue. My media diet of Guardian Australia obviously gives me a lopsided view of the political conversation. Here, a housing crisis of unprecedented proportions in peacetime makes headlines all the time. Sydney is on steroids, a city in the most land-abundant country in the world only outpriced by Hong Kong.

Kohler argues that the current Australian average house price vs. median income ratio, at ca. 7, is about twice as high as pre-2000, when it was remarkably stable at 3.5 for long periods of time. Sydney leads that “unaffordability” list by far (the factor cited above is consistently above 10).

People are locked out of the housing market, particularly young professionals at the beginning of their careers, when their incomes are generally below median. Millennials are also less likely to be “middle class” in Australia than OECD average.

What are the reasons for this particularly Aussie and Sydney bent to the “real estate state” (a, yes, Morningstar article sums these up neatly, too)?

Two simple policies, in the eyes of Kohler, are chief culprits: negative gearing (the ability to offset against your taxable income losses associated with owning a property, i.e., mortgage interest payments being higher than rental income) and a sweet 50% discount on the capital gains tax coming due when selling a property that has been owned for more than 12 months.

A few other things are striking about Australia: The above dynamics occur in an urban setting that was planned after the advent of the car. In fact, suburban typologies begin very near the geographical center of the city, leading to vast spread and a paucity of public transport, making higher density further away from the city center now difficult to achieve. On top of that Australians live in the biggest houses worldwide.

What needs to happen?

House price increases have to stop exceeding real GDP and wage growth. Ideally for a period long enough to restore the affordability metric median income to average house price back to ca. 3.5.

We could be talking decades, unless house prices drop by 50% on the spot, causing havoc mainly to those who deserve it less than those with several investment properties. Come to think of it, the amount of times I have heard people casually throw around the word IP is rather telling about how pervasive the problem is.

In a country with such high property ownership it is politically inexpedient to demand falls in house prices. (It is important to keep in mind that in the big cities, renting still tops owning.) According to Kohler, the Labor Party lost the 2019 election because it committed to slashing some of the above, i.e., negative gearing and CGT discount.

You might not even get the support of all renters for policies like these: Many of those not owning a house yet but keen on buying (at all cost) will become staunch supporters of rising house prices, precisely because of the inflated levels at which they have bought. Outright owners and those with IPs are wringing their hands.

As in other countries, home ownership has been encouraged by most post-war governments, but especially by the conservative Liberal Party, including the 1960s first-time buyers grant. (Homeowners are said to vote more conservatively, and get annoyed at fiscal deficits driving up inflation, leading to higher interest rates on their mortgages–crudely simplified of course.)

Meanwhile public housing has remained low by OECD standards. Several OECD countries also have rent control policies, whereas Australia only lightly regulates rents.

There are a few options the Australien government has to address the issue (without breaking with core capitalist principles, but more on that in a later post).

First, stop negative gearing or only allow homeowner-occupiers to tax-deduct (some of) their mortgage payments like in other countries. To allow negative gearing on investment properties is ridiculous, and makes you understand why already exorbitant rents aren’t even higher at prevailing house prices.

It is macroeconomically poor beyond comprehension to attract capital into such zero productivity activities. But then again, this is a resource-rich country generating much of its wealth from the export of primary commodities.

A second option would be to get the superannuation (Australian pension) funds to invest in build-to-rent schemes with a strong affordability component. There is some movement in the sector, but the mantra appears to be increasing profitability, also for foreign investors, rather than home affordability.

More supply might create lower prices, sure enough. But at current levels of migration, the private sector appears unwilling and unready to provide the shelter needed for a rapidly growing population that are not top earners.

Australians cannot fix interest rates on mortgages for more than 1-3 years. This hits them now particularly hard as mortgages have mainly repriced to much higher rates (adding additional pressure on rents).

Kohler said that a longer-term mortgage at fixed rates would be welcome, alas Australia appears not to have had the “right” government at the time when other countries laid the foundations as early as the 1930s under FDR in the US.

A more interesting point raised by Kohler regards psychology. I am new to this country but apparently the capital gains tax discount in 1999-2000 was a significant moment in the transformation of housing into class of investments. It is no longer a place primarily conceived of as “home”. This is obvious to anyone who has been on the market for a new rental “property” like ourselves.

There are now some YIMBY groups going to council discussions on new developments. This is a welcome development given that NIMBYs are generally better represented in these fora. The primarily young (millennials and on) people want to ensure rent affordability and long-term tenure security. Pretty basic demands.

Better transport would also be good, allowing people to live in the suburbs and commute in less time and for less money than currently possible. This problem is now being addressed somewhat, but much of the gains will be privatized.

The station near my house and its adjacent development are undoubtedly finger-licking news for nearby property owners, as well as for the developers who will market the “mixed use” districts that will almost certainly become perversions of publicly-minded civic projects, unaffordable at that.

How can you change the perception of housing as an investment property back to a place to live? Just like inflation is being driven by expectations so are house prices. The expectation of ever rising house prices needs to go. Only this will change the psychology of real estate in this country.

The longer we wait the tougher the adjustment will be. I find it increasingly common sense to apply Georgian economics to urban land / housing (no land ownership in cities); as well as echo the strategies voiced by Samuel Stein in his Capital City: Gentrification and the Real Estate State that involve large-scale expropriation.

Not all of the above has been said by Kohler, but clearly this topic has been on my mind for a while so I thought it’s a great chance to jot some of the thoughts down to paper in a stream-of-consciousness post.

Real estate has permeated the psychology of the people here, more than in any other place I have lived in. But then again, I haven’t lived in Europe or the US in a while, and it might have become very similar around the world.

Perhaps needless to say but a necessary disclaimer: I really like it here in Australia in general and in Sydney in particular.