Younger Generations Won’t Benefit From A Housing Bubble Burst, The Super Rich Will

Ad Long is a crime writer (toogreedytolive.com) and illustrator of the best-selling 'Girt: an Unauthorized History of Australia' and its upcoming sequel, 'True Girt'

Approx 5 minute reading time

Rising house prices in Australia are a bigger problem than anyone is saying. We know that buying a house is already an impossible dream for very many younger wage-earners, and that’s not about to improve unless we do something about it. So what are the options? What can we do?

If prices were to fall significantly (because the housing bubble burst for example), that could hurt more than it helps. The US sub-prime mortgage crisis a decade ago wiped out countless home-owners. Poorer people, who had been given loans they could never realistically hope to pay off (ie: ‘sub-prime’), didn’t actually lose much, as they hadn’t sunk much money into the homes that the banks repossessed.

It was regular, middle and working-class home-owners who were hurt the most. Their largest asset, bricks and mortar, plunged in value overnight and in many, many devastated neighbourhoods those homes will never regain that lost worth. Of course, when the outstanding mortgage is higher than the value of your house, years of savings and repayments are wiped out.

Australia has always had a high rate of home ownership compared to most developed countries. 65% of our collective wealth is tied up in real estate, so there is a not-surprising enthusiasm among home-owners to see prices keep rising. Older Australians, who got into the market when it was far more affordable, have grown steadily wealthier than their children and grandchildren.

We’ve just re-elected a Government that is determined to keep negative-gearing as a tool for investors, and so keep pushing house prices higher. Some of us can only hope to get into the real estate market when our parents die, and we inherit a share of their home. What happens, though, if the bubble bursts here?

Learning from the US

In the US, since the Global Financial Crisis, the economy has picked up and new wealth has been generated. Even more than ever, though, that new wealth has been shared among the top 1%. After a real estate price crash, the people best placed to cash in and ‘buy low’ are the very wealthiest. Anyone whose home is their primary asset has just seen its value plummet and is in no position to take out a fresh mortgage and buy an investment property.

In those circumstances, a young would-be home-owner who has been saving would be well-placed to buy, but their gain would be massively out-weighed by the losses felt by homeowners already in the market. As they are now, those first-home buyers would find themselves competing in the market against investors.

The US housing crash caused a huge redistribution of wealth, and it was the rich who got richer. We know that wealthy inequality is growing and growing. It doesn’t look like a Turnbull Government in Australia is going to do anything about that, and neither a Clinton nor a Trump presidency is likely to help America.

At the current rate that capital is being consolidated by the most-wealthy, the top 0.1% will own 60% of all assets in 30 years, and the rest of the 1% will be fighting over most of what’s left. The 99% will be renters and wage slaves. That’s not my opinion, it’s a mathematical fact. The economists who study the problem, like Thomas Piketty, are agreed, yet somehow our governments and media are ignoring the issue.

After enjoying the middle-class comfort of the second half of the 20th century, in western democracies, it’s hard to realise quite what that will mean. It’d be a return to 19th century ways, (picture ‘Downton Abbey’, and you’re not upstairs, you’re downstairs). The bulk of us would work for our overlords, who’d own everything.

It’s hard to see voters in developed democracies allowing things to go that far, but that is the path we’re on right now. In Australia, with our fondness for home ownership, we’re probably two big housing crashes away from serfdom.

It took two world wars and the Great Depression to create a more equitable world, as well as a post-war building boom, changes to banking laws, and very high top rates of tax. 40 years of Milton Friedman/Reaganomics (with Rupert Murdoch as head cheerleader) and we are almost back where we were 100 years ago and more.

We the people can do something to stop the super–rich helping themselves to everything. In fact, we must. When it comes to our homes, we could demand an end to tax-breaks like negative gearing for investors.  When that was discussed pre-election, the response from the real estate industry (and government) was that it would lead to a levelling off in house prices, or even a decline.

That’s exactly what we need, if it will avert an eventual crash in the market. While we’re at it, let’s tax foreign investors buying houses here- but let’s also tax local investors. A sliding scale for capital gains on investment property wouldn’t stop mum-and-dad investors from owning a second house or a third, but it would mean that very wealthy property owners would pay a decent tax rate on their capital gains.

If you think that’ll just drive those investors out of the market, looking for lower tax rates elsewhere, you’re probably right. So we need higher capital gains tax all round. Malcolm Turnbull pays a far lower tax on the river of income that his $200 million fortune brings in, than a regular wage earner. Does that make sense? His fortune can’t help but grow and grow, while most renters can’t afford to buy a home.

Being rich shouldn’t preclude our PM or anyone else from a life in politics. However, if his tax policy proposals consistently favour the wealthy (as Turnbull’s have done), then we voters need to express our outrage. We need a debate about taxing capital, not raising the GST, and we need to demand it in this term of government. Australia’s next election must put in place leadership that gives everyone a ‘fair go’- in the housing market and elsewhere.

The alternative, here and everywhere else, is that we go back to the tried and tested 20th Century method of redistributing wealth: bloody world wars and a global depression. The Bern, The Donald, the Brexit vote… there have been clear signs around the world that people are growing restless and demanding change. Governments, and the greedy rich who influence them far too much, must be held to account.

If you need motivation to get excited by negative gearing, capital gains and the issue of whether a tax is progressive or regressive, then consider what’ll happen if you leave it up to the Malcolm Turnbulls and Scott Morrisons of Australia. It won’t necessarily be their fault if the revolution comes, but they’ll be among the first up against the wall.

Ad Long is a crime writer (toogreedytolive.com) and illustrator (seafurrers.com)