So bubble mania has finally hit the mainstream. The housing bubble question has landed squarely at the feet of the Prime Minister and his treasurer, and only 10 to 15 years late… What a relief it is then to hear our fearless leaders assure us that there is no bubble, endless house price rises are universally a good thing, and that only poor people try to live in houses they can’t afford.
Belonging to the overseas-holiday-and-smart-phone-addicted, perpetually maligned, short of attention and financially illiterate Generation Y, I thought I’d offer my enlightened dissertation on the monumental balls-up that Australia now finds itself in. Aren’t we sick of being lectured by the existing landed classes, older generations and the real estate, banking, media and political circus that pretends to have half a clue about the largest financial, economic and social risk and injustice of our generation? It may surprise them to know that a lot of Gen Ys understand a lot more than we are taken for, and know a bubble when we see one. We do understand the slightest thing about risk, and are now ready to flip the bird in monumental fashion.
So fair warning, this is an entitled Generation Y whinge to rival all others. A rant for the ages. The magnum opus of a landless youth with no-one left to direct anger at that will listen. I promise it will be worth it though, so stick with me, you won’t want to miss the ending to this story.
Let’s be honest, at the heart of their preposterous responses to the bubble subject this past week, is an attempt by Hockey and Abbott to fend off panic.
That is the real truth behind political inaction on affordability. No one wants to own the crash. I’m continually surprised by how few journalists identify that plain fact.
As I’ve explained, and history shows, it is impossible for such circumstances to continue indefinitely. There is always a cycle at work, no matter how long the cycle. There is only one way out of this for young people, and that is price falls. The time for solutions like tax reform to save us from this fate has passed. We must still pursue these reforms to prevent the next bubble from kicking off down the road, but we cannot prevent the completion of the bubble cycle. All that is needed is patience. No one bothers to explain this whole back story and actually provide real advice to young Australians. All we get is stereotypes, platitudes and false dichotomy. We are constantly let down by people who should know better. People who should have learnt from Australian history and recent global history exactly how dangerous housing bubbles are.
Bu instead young people are hypnotised by the corrupt and sinister plea to “Buy now or forever miss out”. Ask yourself who it is giving this advice, and who the advice really serves. Apply a little ‘cui bono’ (who benefits) to those real estate industry pimps and pushers.
Poisoned chalice …
A whole generation of leaders and land owners is asking the current generations to accept the poisoned chalice that is Australian real estate. I’ve long said that housing affordability is only the main symptom of the disease, and that the greater injustice is the disease itself, an utterly broken economic model that is wholly reliant on housing speculation, and its sinister ‘comorbidity’ factor: unacceptable financial risk.
Unacceptable financial risk is exactly what young Australians are being asked to take off the hands of the landed class, a giant intergenerational transfer of wealth in return for a broken system, just like climate change (apologies, but the analogy is such a good one).
The overwhelming expert consensus is that Australian housing has never been less affordable and more risky. Yet members of Gen X/Y are arrogantly dismissed as spoilt and entitled. Somehow I’m meant to be selfish for rightly pointing out the 20+ years of policy failure (policy rigging) serving the entitlements of existing home owners and speculators, which ruined the productive economy in the process, and for pointing out the terminal risks being thrust upon us. That I’m just an entitled youngster living at home with my folks with inflated expectations, who only cares about how to snag some trendy inner city dive.
This indefensible point of view has been a widespread phenomenon across the Western world in the last decade or so, as those who have benefited from global housing bubbles and rigged financial systems must shoulder at least part of the blame, but instead seek to alleviate guilt by disparaging those on the other side of the fence. Looking at the world post GFC, it’s pretty hard to see how young folks deciding they couldn’t afford a house because they spent too much money on iPhones and didn’t want to live 100km from where they worked, somehow caused the greatest financial meltdown since the great depression. Sorry folks, the answer is private debt and housing bubbles.
The cognitive dissonance of those who defend the status quo is astounding. My publicly professed aspirations as an eventual home owner are meant to somehow preclude me from being critical of economic policy and tax settings that completely ruined our economy, because I’m just entitled. That’s why young folks are finally calling bullshit, and like all bubbles, this one will collapse under the weight of its own hubris and internal contradiction. We’re not selfish, we’re just not financially suicidal. We’re f*ing sensible, and not ready to stand by and take another bolloxing from the powers that be and their indefensible protection of the worst housing bubble in a hundred years.
Young Australians are expected and encouraged – even conned and bribed – into taking on utterly crippling levels of mortgage debt in the assumption that the housing bubble party will continue forever, and that the only way to a secure retirement is to sell your soul for a slice of Aussie real estate. Meanwhile, there is nearly universal acceptance that our housing market is unsustainable in its current form, and a countless list of official warnings from global and local regulators and economic bodies such as the IMF, the OECD, the RBA, ASIC, APRA, international ratings agencies, the Murray Financial System Inquiry, and now arguably our top economic advisor and public servant, the head of the treasury John Fraser. They have all at some time in recent history said we should be very wary of our house prices and the possibility of collapse.
When do the economics editors of the country ever refer to this long list of warnings, and apply it in cautioning young Australians to be extremely careful when considering the risks of entering this current market? How dare these charlatans convince the impressionable younger generations to take on such astronomical risk with barely a mention of these warnings that have repeatedly issued forth from the most experienced and trusted economists in the world. Do Joe Hockey and the tabloid pro-housing spruiker journalists and garden variety real estate agents somehow know better? Are the worlds top economists and analysts just a bunch of doomsayers and clowns? No, they just understand what risk is, unlike the majority of Australians.
By now it is self evident that house prices must fall to restore affordability. I go further and argue that because of the universal characteristics of a bubble described above, and a backdrop of deteriorating economic conditions and falling incomes, a house price crash is the necessary and inevitable solution to housing affordability.
Given that fact, for young Australians like me, I want to paint a picture of the utterly improbable and devious situation that we are being asked to swallow, by drawing further attention to the contradictory view frequently shared by senior politicians, journalists and writers from an older landed gentry who profess to have a genuine concern for the ability of the next generations to own land at some point in the future, but do not wish to suffer price falls. Or if they begrudgingly admit price falls are needed, the admission is usually coupled with calls for some kind of mitigating policy (such as first home owner grants or allowing access to superannuation for housing deposits or cautioning advice), or counselling caution in reforms in order to ‘avoid distorting the market’, or to ‘avoid a crash’.
In taking this supposedly sensible position, these allegedly well meaning individuals in positions of influence are unavoidably acknowledging the very real threat of a market collapse, and the implications for the economy, financial system, and their own personal assets. But they also feel guilty enough (or possess a conscience enough) to want a solution to housing affordability. They don’t want the market to collapse, but they want young Australians to be able to buy into the market that they know is at risk of collapse…
Think about that for a minute. The notion that making necessary reforms to housing and tax policy might trigger a market downturn and should therefore be offset by some form of stimulus or ‘grandfathering’ of reforms, is a deeply troubling one. If the market is due for a collapse (which it is), it won’t be because of measures to correct the imbalances, it is because of the imbalances themselves.
All the risks of the massive imbalance …
In other words, most of the economists, journalists, politicians and the landed gentry that they represent, who occasionally advocate for housing reform and solutions to housing affordability, are asking the next generation of Australians to assume all of the risks of the massive imbalances in the housing market, while ensuring that the market is held up long enough for them to pass on that risk. They want us to inherit the enormous risks that they created, holding open the fire escape just long enough to get out before the collapse, which they quietly acknowledge is the most likely eventual outcome.
What a conceited set of leaders and commentators we have. I vainly hope for royal commissions and criminal charges to be laid in some not-so distant future when our livelihoods have been destroyed by the pedlars of Australian real estate who do know better. In Ireland, a country devastated by its own epic real estate bubble with striking similarities to our own, there have been no criminal charges. But there has been an official inquiry. And the results show that the Irish media were complicit and culpable in their unquestioning loyalty to booming real estate and their wilful blindness to the unfailing history of asset/credit bubbles to destroy at least as much wealth as they created on the way up. They were shown to be complicit due to their proven conflict of interest in deriving profits from real estate mania, and no doubt because of a desire to protect their own personal land holdings, and deny any existential threat to their paper wealth.
The long and shameful (and predictable) history of asset bubbles proves that the beneficiaries of the bubble are always victim to a certain exceptionalism, a notion of providence and intelligent decision making that enabled their participation in such windfall gains. The smart investor that got in at the right time. If only there was a way to alleviate the nagging guilt and subconscious fear that eventually there will run out a stock of greater fools to maintain the bubble. Because when there is no stock of greater fools, a self-fulfilling destiny of price collapse follows, as price falls at the margin trigger a rush for the exits by those speculators with negative cash flows who can no longer rely on ever rising prices.
The way to temporarily alleviate this guilt and fear is usually to argue for the economy to catch up to this imbalance between prices and economic fundamentals. The bubble deniers argue that for almost the first time in history, a price bubble will not have to deflate, but that the rest of the world will catch up, justifying the speculative wealth gains achieved by the bubble participants and their exceptional investment choices.
And worse, this exceedingly improbable plan to manage or ‘taper’ the bubble is in direct contradiction to the notion that it is in the interests of those excluded from the bubble to be granted help to participate at this late stage. It is an admission that the bubble cannot go on as it has, but must be preserved in a permanently high plateau to protect speculative wealth gains, and yet sold as a worthwhile risk and investment to the next generation of buyers who will falsely believe that recent price history will repeat itself, but that the long term history of prices matching economic fundamentals – like incomes, rents and economic growth – will not repeat itself. It is disingenuous in the extreme.
This is the cognitive dissonance that our political economy suffers from in huge measure. Everyone with land has a stake in preserving the status quo, even if they do not admit it, and when the vast majority of experts themselves are part of the landed class, we cannot trust their notions of bubble management that masquerade as altruism in assisting people to afford housing at the peak of the bubble. This can only be seen as an offensive disservice to young Australians who don’t know better.
Investment, finance and economics is all about understanding and managing risk, and when we cannot trust anyone to tell the truth about risk, be it media, politicians, family, friends, and certainly not real estate agents, it is the surest sign that we are reaching the zenith of the largest land bubble in Australian history. It should serve as a severe warning to the un-landed masses to avoid at all costs being drawn in to this apogee of risk, just to enable the winners to cash in on their paper wealth, and get out while they can. This is the hot potato that young Australians need to reject at all costs. Let it fail because it must.
For otherwise intelligent and expert commentators and leaders to accept the very real risk of collapse, but to convince the impressionable young to assume that risk is a deeply selfish and contradictory perspective that must be condemned. History will ensure that it is condemned, so for your own sake, don’t fall for the greatest con in living memory. It is inevitable that we will see at least some price falls, and that these price falls will lead to a rush for the exits when there is no longer any policy or monetary levers left to bail out the market. Therefore you have nothing to lose from waiting this out and shunning the housing bubble, and everything to lose from gambling on this sinister and severe level of risk that we will shortly come to understand in all of its emergent horror.
Because what comes next is the housing crash we had to have.
• George Smiley: Buy! Buy! Buy! The Joe Hockey Real Estate Primer Part One … From the treasurer Joe Hockey: “Real Estate is not a bubble!” “It’s supply and demand; It’s Economics 100! Get out and build. build, build. Interest rates are at record lows! There’s never been a better time to buy! Get a good job and buy a good home! The last is especially poignant as he not only has a good job, his special parliamentary living-away-from -home allowance is going as rent to his wife in HER home where he stays when he is in Canberra, and no doubt that goes a long way to paying the mortgage, and perhaps that means there is a 2nd capital gains tax- free residence for the Hockeys, with each having a different ‘principle residence.’ And some of us remember how Joe’s Liberal predecessor Peter Costello taunted Senator Nick Sherry for claiming his allowance when he stayed with his mother in Opossum Bay back in Tasmania. “What does mum say when Nick walks in the door? Oh, Possum!” …
• Philip Lowe in Comments: I’ve seen a few property bubbles burst and people get hurt, usually families. No community will survive long term without a spiritual aim. Sky high house prices are not a spiritual aim. I speak to people in Sydney and they gleefully tell me of how much their houses are worth. and it’s bugger the poor sods left behind.There is something fundamentally evil about the people who get rich off this. I used to stand in ‘Shippies’ on a Friday night listening to men talking mostly about the price of real estate. Nothing is forever.