The Australian property market is finally showing some signs of running out of steam, which is approximately a decade later than more sane commentators had anticipated. It is now considered to be the world's longest bull market — 55 years.
Residential property is by far Australia's largest asset class. It is valued at $7.3 trillion, according to Bloomberg. To give some idea of how large that is, Australia's GDP is about $1.6 trillion, the stock market is worth about $1.6 trillion and Australia's pool of superannuation funds is just over $2 trillion.
The problem with such financial distortions is that they are not just an economic problem, they have serious social and political consequences. When such distortions are unwound, it inevitably hits those who are more vulnerable. The worst part is that banks, which almost always have heavily contributed to the problem, are protected at the expense of the wider society — as was seen in the 'bailout' of Greece, which was in reality a bailout of German and French banks at the expense of ordinary Greeks.
The reasons for the boom in property are well known: an overly generous system of negative gearing and the 50 per cent cut in capital gains tax. This has encouraged a generation of Australian savers, egged on by banks eager to boost their profits, to punt on property as their way of becoming wealthy in the medium to long term. Investors, rather than owner occupiers, are making about half the purchases of property, which is pushing the young, especially first home buyers, out of the market and creating a financially divided society.
From an economic perspective the strategy is as ridiculous as it is popular. Negative gearing only functions when investors make a loss. So a substantial slice of that $7 trillion is deliberately going into loss making ventures. In a country where it is notoriously difficult to get investment capital for enterprises that are looking to make a profit — albeit it with some attendant risk — trillions are going into investments that are deliberately designed to go out backwards. Nothing can possibly go wrong with that.
The hope, of course, is that those losses will be offset by the capital gains made when the property is ultimately sold. But if investors start to see prices falling, they will quickly realise that such gains are far from a certainty. That could easily lead to a massive sell