Could Labor fuel a property revolution?

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The Australian economy rests on a decades-long property gamble that has disenfranchised younger generations. The situation is not as severe as in America, where there has been an extraordinary transfer of wealth to the so-called top 'one per cent'. But it has split Australian society in two: between those who have little or no debt on their homes, and those who either have to rent or have huge mortgages that put them into lifetime debt slavery to the banks: peonage.

Man in business suit holds a model house resting on the palm of his upraised hand. (Witthaya Prasongsin / Getty Creative)It is why the differing policies of the two major parties at the next federal election take on an unusual significance. The voters' choice will go a long way towards determining if that generational split will get better or worse. Labor's promise to change negative gearing policy, and to reduce the capital gains tax exemptions, will radically change the calculations of investors looking to buy property.

The policy is socially and economically defensible, even advisable, but it is quite a risk. If investors, who make up about half the buyers in Australia's residential property market, decide that the negative gearing tax scam no longer works for them (it might dawn on them that to get the negative gearing tax deduction they have to lose money, and a higher price when they eventually sell is no certainty), then there could be a sharp downward spiral in house prices.

That would mean that Australia's dominant asset class would be in trouble. To give some idea of the relativities, Australian houses are worth almost $7 trillion, which is more than triple the value of the stock market and the superannuation pool.

Worse, Australia's banks, which concentrate most of their business on lending against property, could easily get into trouble if property prices fall. This would in turn probably lead to a sell off in the stock market because the banks make up such a large proportion of the market capitalisation. And it may make business loans harder to get. It is not difficult to imagine, in other words, some seriously problematic outcomes.

Still, addressing the extreme distortion towards property is essential for the health of the Australian economy. As the economist Michael Hudson has documented, the economic history of the West is a continual battle between a rentier class of lenders or a political elite, and the people. Rome, he notes, was a 'financial rentier state', and Athens was for a time under the thumb of a wealth obsessed oligarchy (Socrates went barefoot to protest against the greed).

This inevitably leads to debt-driven crises because the debt becomes unsustainable — a phenomenon now occurring globally as global debt goes over 300 per cent of global GDP — and the solution has usually been some form of cancelling of the loans. But that seems very unlikely to happen in the current context. What is being done instead in most parts of the developed world is 'economic austerity' which is code for bailing out banks, at whatever cost, so as to keep the game going and expand the number of debt slaves.

 

"These circular arguments are really just there to support the finance sector: rent seekers and creditors. They do it through a sleight of hand that makes transactions primary and everything else secondary — as if money is the reason to exist, rather than a tool."

 

Australia's version of the predatory, rentier class, is the 1.3 million Australians who claimed rental losses on their tax during 2016-17 and the banks that fund them. What they are doing is quintessentially unproductive because it entails investing in land value — and then making a loss. Land produces, in itself, nothing. Meanwhile, getting money for productive businesses usually requires getting a loan secured against property.

If there is a shock to the economy because of falling land values, it is likely to be far healthier in the long run, because it would mean capital will be invested in a broader range of industrial activity. Australia would have more of a mixed economy rather than one resting on a property bubble, and perhaps an economy in which the question asked is 'What can the market do for us?' rather than 'What can we do for the market?'

The property investment binge has another nasty underside. It is a purely financial play and financial markets are very different to other markets. Whereas demand for most products has limits — you can only eat so many hamburgers, for example — the demand to acquire money is without limit. That is the essence of greed: the desire to keep acquiring continues even when all a person's needs have been met (that is what Socrates was drawing attention to).

For this reason alone, the Alice through the Looking Glass nonsense that is contemporary economic theory should be discarded. These circular arguments are really just there to support the finance sector: rent seekers and creditors. They do it through a sleight of hand that makes transactions primary and everything else secondary — as if money is the reason to exist, rather than a tool.

As Hudson comments, it 'justifies oligarchies breaking free of public control to appropriate the economic surplus by indebting economies to skim off the economic surplus as interest and then foreclose on personal landholdings and public property, overthrowing mixed economies to create a pure oligarchy'. In the Australian context, that oligarchy has become the negative gearers. It is time for a revolution.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Witthaya Prasongsin / Getty Creative

Topic tags: David James, housing, election 2019, superannuation, negative gearing

 

 

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Existing comments

The negative gearing policy promoted investment in dwellings but should never have been allowed to purchase existing dwellings. It is a significant miss by the coalition to not understand that the law needs significant modification. One proposal would be to give investors a 10 year window to exit their investments or lose deductibility at the end of it... a sliding scale on the way through. Another would be to immediately lose deductibility on more that one home negatively geared. Why should any of us fund a strategy that is surplus to individual wealth needs? Only allow citizens living in Australia to purchase homes? The rub for a newly elected government with these policies is they could get very very ugly. Australia’s indebtedness per cap / GDP is some of the highest in the western world. This stat matters and it most certainly matters in an environment of asset depreciation. A friend lamenting just yesterday that her investment apartment is well under purchase price and all her equity (savings) have been lost should she sell that today. In the USA many years ago we saw an acquaintance list their property at $1.45m then $1.35m then $1.25. Then they got foreclosed and the bank sold it for $325k. Yes David, it might be time for a revolution but be careful what you wish for. In these situations, banks fail. While we are on such things, why should any of us “fund” the health care costs of the aged where such people have millions of dollars tied up in a family home ? Taxpayers in this instance are funding costs - that the aged individual can afford but does not pay for. This allows the aged individual to make a bequest at end of life to children. ie taypayers are making/funding a tax free payment across to the children of the asset holder. Why should we not be required to pay for ourselves if we have the wealth to do it ? Such laws are not sustainable in the long term.
Patrick | 10 May 2019


Thsnkyou David and your comments Patrick , it is time for a response , to make a ripple in the often hidden vast ocean of wealth in Australia .. .. my niece and her 2 primary school aged boys are couch surfing in Melbourne , after the rental house they had was being sold for demolition to build units. This has happened 3 times in 5 years , a family has to find affordable accomodation . My niece is tertiary educated and her partner is a Tailor - bespoke creative clothing maker and designer, unable to keep the small business going HD has enrolled in youth work at TAFE, my niece is working at a florist . Rent is expensive and after 5 months it’s impossible to find any small 2 bedroom unit let alone a house they can afford. This is disgraceful in Australia , hard working young families unable to afford rent , electricity , water etc and hold no dream of owning their own little home. Something is very wrong , economies should look after the most valuable part of the market People , and people create the demand for goods and are the reason for goods and services -things! Yes Money is not the reason and we are all slaves - assets are our time with family , health and natural resources.Yes there is too much gearing towards growth , we need a limit to wealth and focus on sustainable living - a more just and equal society would have less crime and less mental and physical illness - when will we get that ? Young people have become disenchanted - look at unprecedented suucide and drugs and alcohol use ? Where us innovation and creativity - imagination is shut down in this money driven greed is good ‘ economy’ and the greater good is dismissed
Catherine | 10 May 2019


This talk about "generational split" is not really that accurate. In my opinion it's been a "look over there" exercise by the conservatives to deflect the blame for unaffordable housing away from the Tories' own bad economic policies and governance. I suggest two exercise: 1. go for a walk along the North Bondi to South Head walking track and see how many multi-million dollar houses in that area are owned by pensioners and self-funded retirees. Very few from what I have seen. 2., visit the Housing Dept high rises in Redfern and Waterloo (or their Melbourne equivalent) and talk with the pensioner tenants there about their franking credits and second properties. Then there's the story about pensioners living in million dollar houses. The reason for that is that many migrants especially Italian and Greek bought cheap housing in then unfashionable suburbs like Darlinghurst, and have lived to see their properties rise and rise in value. They are "asset rich, cash poor". Some heartless people - not all from the Right - want to kick them out and have them live in Woop Woop away from social and health supports. What will that achieve?
Bruce Stafford | 11 May 2019


Patrick, you ask "why should any of us “fund” the health care costs of the aged where such people have millions of dollars tied up in a family home?" In fact, the aged only start getting hospitalised regularly in the last 18 months of their life. Ask any Geriatrician. Communirty services are far far cheaper than residential aged care or hospitalisation, yet they are consistently underfunded by state and federal governments. And I will point out that the cost of community services is partly paid for by the recipients too. Their hospitalisation costs have also been paid for by their taxes in their working life. (Smokers BTW pay their way through the health system via their cigarette excise taxes). This "why should any of us “fund” the health care costs of the aged where such people have millions of dollars tied up in a family home" stuff is just yet another "look over there" exercise by the LNP to deflect attention from their poor economic and social management.
Bruce Stafford | 11 May 2019


The answer is in the hands of the voters in this election. There is no doubt that the younger generation have arched up about climate change and social justice in its many forms. And, there are a few creatives making waves, who have set about to make changes in this housing crisis. They are to be praised and acknowledged. For example, Dr Andrea Sharam and the housing hub for people with disabilities. Surveys, town planning, architects, social justice action people reserve the right to lead the NEW ways to be community. Let's follow their lead and start the new way to live with a social conscience and make 'housing affordable' and a home for everyone. Anne
Anne | 11 May 2019


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