What Joe Hockey doesn’t understand about house prices

Now, Joe Hockey is the Federal Treasurer, so you would expect him to have some understanding of the fundamental economic conditions that affect average Australians.

Like housing affordability.

But no. Joe seems to make a habit of demonstrating his lack of understanding of the economic conditions that affect most Australians.

Treasurer Joe Hockey often appears troubled by some economic ideas
Treasurer Joe Hockey often appears troubled by some economic ideas

He argues that while housing in Sydney is expensive, it is still affordable because people keep buying houses.

And he’s right. But this is an overly simplistic view. The bulk of borrowing for housing in Australia is now done by investors (52% as against 48% for owner occupiers).

There are two reasons why people invest in housing.

The first is to ensure an income stream and the second is to benefit from tax concessions which make the capital gains from real estate the most important element of the investment.

It’s the capital gains aspect that creates the problem. Investors put money into the real estate market in the hope of future gain. These hopes are based on knowledge of historical gains in real estate in the major cities, particular in Sydney way increases in real estate prices have been outstripping the stock market.

 The simple reinforcing loop of housing investment
The simple reinforcing loop of housing investment

The dynamics of this loop are that investment drives up prices which drive up hopes which drive up investment. So we get an escalation of housing prices driven by investors and supported by negative gearing.

Joe doesn’t seem to understand that the activities of the housing investor put real estate prices beyond the reach of the first-time buyer the also denied the advantage of negative gearing.

Joe also doesn’t understand the concept of the housing bubble. The housing bubble bursts when interest rates rise to a point where the investors can no longer afford their loan repayments, despite negative gearing. This leads to a fall in house prices which affects everybody, not just investors.

One thought on “What Joe Hockey doesn’t understand about house prices

  1. Tim’s analysis is spot on. What I also find interesting is whether this bidding contest is a symptom of the increasing divide in income distribution. As Tim observes, with the help of tax policies, the price increases are afforded by those at the top . The ones that miss out and are penalized by the high prices are those at the middle and bottom of the income scale.

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