I talked yesterday about why I’m a bullish investor, even though we’re living in a world of economic madness.
Maybe you thought that sounded a bit weird when you read it?
But it’s an age old story.
Bubbles last longer than people think they can. Busts are harder, steeper and sometimes longer than anyone can imagine.
Take Japan for instance. Its property prices and stock market are still trading below 1990 levels! Levels reached following a multi-decade, debt driven boom.
You’d think humanity would learn from such events. But you’d think wrong.
After, all who wants to be the one to spoil a good party?
When everyone’s making money, no one wants to rock the boat. And in Australia it’s party time right now for a certain group of people.
Anyone who bought a property in Melbourne or Sydney in the last 10 years is likely to be doing very well right now.
And if it’s a decent block of land in the inner city, they’re likely a paper millionaire to boot.
I know labourers, office workers and servo managers that are all now part of the millionaires club.
People of modest incomes and fortunate timing.
And good on them. The Aussie ‘fair go’ extends to everyone after all.
Or at least it used to.
You see, I’m not sure this model of economic growth is going to work in the future.
If it really is economic growth at all?
Maybe it’s just a mirage? The combination of record low interest rates and an economic system built on debt?
It makes everyone feel richer, so they spend more. After all, the capital gains are covering the costs!
Envious non-property owners see this and think they’ve got to jump aboard.
And if everyone now thinks buying and holding property for 10 years is the way to go, who’s going to bother creating the real engines of the economy?
Who’s going to innovate and work hard to build a business when you can just buy a property and sit back?
The reward for idle speculation sure beats the reward for hard fought innovation.
That’s if you can afford to speculate, of course.
And there’s a growing group of people who can’t.
Personally, I think a crunch time is approaching…
An uncomfortable truth
I’m going to tell you what’s really happening at the moment.
You don’t hear anyone else talking about it.
It’s an uncomfortable truth.
First full disclosure, I’m lucky enough to be on the property ladder. But I have younger siblings who aren’t.
And to me it’s not a fair system we’re living in.
You see, what we’re actually seeing is a transfer of wealth from non-home owners to home owners, on monumental scale.
Things are harder for first home buyers right now than they’ve ever been.
Don’t get me wrong. It was never easy. But it was never this hard…
Look at the evidence.
In the mid-90s it took around three years for a middle income household to save for a home deposit.
Now it takes 20.
Many have increasingly found themselves with little choice but to rent privately. But even that’s costing them.
For those stuck in the private rental market, the proportion of income spent on housing costs has risen from around 10% in 1980 to 36% today.
Unlike homeowners, there’s no asset wealth to draw on to fund new cars or holidays. It’s just dead money.
An increasing amount of people are unable to buy a house in Australia.
And they’re not just missing out on gains. They’re actually getting poorer.
Let me explain…
When the value of a house goes up, the total productive capacity of the economy is unchanged. Because nothing new has been produced.
It’s the same thing at a different value. It merely constitutes an increase in the value of the land underneath.
We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others.
Or as economist Joseph Stiglitz puts it ‘getting a larger share of the pie rather than increasing the size of the pie’.
The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments.
This wealth hasn’t been ‘created’. It has been stolen from future generations.
Those with the biggest slices have just got more.
A buyer’s dilemma
The law of diminishing returns tells you this has to stop at some point.
Otherwise we eventually end up in a 15th century world of landed gentry and working serfs!
So what’s a young person or couple to do, then?
Buy into the most inflated asset of all time and hope interest rates stay low enough, long enough for a new generation to come along and keep the Ponzi scheme going?
Or stay renting in the hopes of a correction which may or may not happen in the next decade? Remember the first point I made. Bubbles can last a lot longer than people think.
I think Australian society has to come together to start addressing this growing problem.
The outcome isn’t just bad for future generations.
It could be bad for everyone.
What if young people decide to take their tax-paying incomes elsewhere, to more cost-of-living friendly countries?
If they did this in sufficient numbers, the lower tax revenue would mean larger government budget deficits.
In turn this will hit things like Medicare, retirement homes and health services.
Perhaps a soft property landing is in everyone’s interests right now?
But as I said before, who wants to be the one stopping the party?
In my opinion an economy that rewards idle property speculation over the innovation and hard work is bound to fail eventually.
The question is, can we be proactive as a society before this happens?
Or will the recurring cycles of booms and busts, feast and famine impose changes on us that we should have made much earlier ourselves?
Editor, Money Morning