Around the middle of March, tax reform group, Prosper Australia, invited young adults to strike against buying a home until house prices moderate. The issue attracted a fair bit of media coverage and as one would expect got plenty of twitter and face book action.
Leading property commentator Michal Matusik recently gave his thoughts on this Home Buyers Strike saying:
Prosper Australia wants 10,000 people to sign their Total Abstainers Pledge; want negative gearing limited to new home construction (then phased out completely); stamp duty abolished and replaced with a higher and flatter land tax and the complete removal of the FHOG.
Matusik said: I like Prosper Australia’s tax reform agenda. But the home buyer’s strike is just a media campaign and will have no impact on end house prices.
Despite activist group GetUp! claiming 6,000 votes in support, less than 700 people have so far signed the actual pledge and only around 50 original comments have actually been posted about such on the Prosper Australia website. Despite claims otherwise, auction clearance rates in Melbourne, a target for the campaign, haven’t been affected.
The whole premise of the campaign is wrong – it assumes that Australia’s housing is “grossly” overvalued; that the Australian housing market is a Ponzi scheme; that young adults shouldn’t have to forego some lifestyle in order to enter home ownership and that they will save any difference between having a mortgage and the cost of renting.
The concept of “overvaluation” is misunderstood and often misrepresented.
Many of the tools used to determine a “correct” house price are too simplistic – house price to income ratio or purchase affordability are two examples. Others assume housing is a pure investment rather, than for most, a place to live. House price to rent ratios; property risk premium modelling and rental discounting are other examples. And some are just plain wrong, such as the “price to nominal GDP” argument.
There are many legitimate reasons as to why Australian house prices are where they are today. Most of them are very unlikely to unravel, making it hard for house prices to fall, well at least substantially, in the future.
Today, Australia’s median house price is about $520,000. It has increased by almost 500% since 1985. Two major factors have influenced this price growth – the decline in interest rates and growth in household income. Combined, these two factors account for over 90% of the house price growth over the last 25 years.
Other factors, and especially in the last decade or so, that have contributed to house price growth include financial innovation; tax cuts; the GST; public spending like the FHOG and a shortage of new affordable dwellings.
I just don’t get it. Why do we want to undermine our household wealth? Lower house prices won’t help jobs and will serve to constrain economic growth. It’s the wealth effect in reverse.
Be very careful what you wish for.
Prosper Australia, if you want to drive house prices down, why not campaign for higher interest rates, lower wages and fewer jobs. That will do the trick. Asking young people to forego buying a property, which is usually their first true step towards greater economic independence, is plain wrong.
Oh and by the way, do you know the fastest sentence in the human language and when it takes place? No it has nothing to do with sex, although if the answer is positive the look on some faces is close to rapture. Answer: “How fast will the price go up?” – asked by most buyers within seconds of signing a real estate contract.
“This report is republished with permission of Matusik Property Insights.”
Source: Matusik Property Insights
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