Housing affordability debate focused on fighting phantoms: Terry Ryder

Let’s assume for a moment that the people raging about the alleged affordability crisis actually care about the issue and want to see solutions.

I say that because much of it is grandstanding by attention-seekers who really don’t give a damn.

The problem they face is that they’re never going to find a remedy, one that actually works, until they identify the real problems. 

So far the debate, for want of a better word, has focused on fighting phantoms. Everyone, it seems, has their pet theories about who’s to blame and is filling up the airways with angry demands that the culprits be dealt with. 

The problem is, no one can agree on who the villains really are.

Recently we had former federal minister and previous NSW premier, Bob Carr, stridently declaring that rising prices were all caused by migrants flooding into Australia. Apparently these people have more money than sense and rampage around our major cities paying way too much for houses, thereby pushing prices beyond the reach of our kiddies.

But the current Federal Government, after two long and expensive parliamentary inquiries into the affordability smokescreen, somehow came to the belief that it was all caused by foreign investors buying mansions when they’re supposed to be buying new dwellings. With appropriate sabre-rattling, the feds declared they were going to clamp down on the dastardly aliens, thereby creating a level playing field, thereby making homes cheaper for our kiddies, therefore affordability fixed. 

So they jolly well forced a handful of foreign buyers to sell back their mansions. There you go, problem solved. Houses cheaper right across Australia. 

Meanwhile, federal Labor has popped up and postulated that it’s not the fault of overseas migrants, despite one of their own declaring that it was, nor the fault of foreign investors breaking the rules. Labor has mandated that it’s the fault of our home-grown investors – not all of them mind you, just the ones who claim negative gearing tax benefits.

So Labor claims it can fix the (Sydney) affordability problem by removing the right to claim negative gearing tax benefits, except for new properties.

There are a few others, including a couple of obscure university activists who published a paper recently, who adhere to the theology that declares negative gearing the source of all evil in real estate, notwithstanding the laughable illogic of their arguments. 

Labor is also part of the camp, which is also populated by economists, that believes it’s the so-called capital gains concession that drives investors beyond reason to paying silly prices for things. 

But there’s yet another school of thought out there, often put forward by economists who think they know more about real estate than they actually do. They claim that it’s grants and stamp duty concessions given to first-home buyers that have forced up house prices, by empowering youngsters who would not otherwise be competing in the market. One sub-theory is that the price of houses rises by the amount of the government grant. 

So take your pick. According to various schools of thought, all of them expounded vehemently by zealots totally convinced of their validity, the villains who force up house prices are:- 

(1)  migrants,

(2)  foreign investors,

(3)  negatively-geared Australian investors,

(4)  all investors who benefit from the CGT concession, or

(5)  first-time buyers bolstered by government grants and stamp duty concessions. 

So who’s right? The answer, sadly, is: none of them! They’re all wrong!

And this is why there will never be any realistic solution to the alleged affordability crisis. Everyone who appears to care is out there chasing phantom targets.

You can’t devise a cure if you’ve mis-diagnosed the illness. 

The buying sector most responsible for prices rising over time is never mentioned in the “debate”. This buying sector is the biggest influence of housing markets because they’re the biggest in number - and they have both the financial capacity and the motivation to pay high prices to secure the homes they want.

They’re home-buyers other than first-time buyers – the next-time buyers. People relocating, upgrading, moving onward and upward. People who have owned homes for years and are seeking to move to bigger and better ones, armed with a strong financial position. 

The problem for those all worked up about affordability (which, essentially, is a Sydney issue, not a national one) is that it’s very hard to nobble them. They don’t receive government grants, they don’t claim negative gearing and they don’t pay CGT so they can’t benefit from the so-called concession. 

To show you what I mean, let’s examine some statistics about market share, as revealed by the NAB quarterly surveys.

Foreign investors, an easy target for politicians wanting to blame an unpopular minority with no political cost, are about 8 percent of buyers of established property.

Australian investors comprise 28 percent of buyers and first-time home buyers are 20 percent. 

The remainder of the market, around 43 percent of it, are those people who never get discussed in the “why prices rise” debate, the next-time buyers.

Given that foreign investors are only 8 percent of the market, it’s unreasonable to blame them for prices rising. You might well ask: what about the other 92 percent?

ATO data shows that a lot of Australian investors don’t claim negative-gearing tax deductions, as many own properties where the rent covers all costs. I am one of them.

My estimate is that about 15 percent of the market comprises negatively-geared Australian investors. According to Labor leader Bill Shorten, in his announcement of his tax policy, those 15 percent are solely responsible for all price rises over the past 30 years. If he truly believes that, he’s an idiot. Again you might well ask: but what about the other 85 percent? 

It’s not just about numbers of people in the market. It’s also about financial capacity and motivation. 

First-home buyers, with or without state government grants (only available now on new properties), are relatively few in number and are constrained by their tight budgets. They don’t pay silly prices for homes. 

Investors are a little more numerous but are still very much in the minority. And they are highly motivated to buy at the lowest possible prices. For investors, it’s all about the numbers, not about falling in love with a single property they just have to have. If they can’t get it at a price that stacks up as an investment, most will walk away – because there are a hundred others just around the corner. 

That leaves that anonymous bunch of people we call the next-time buyers. They’re remarkable for their ability to fly under the radar of media debate. No one ever talks about them. But they’re the most influential part of the market, by a wide margin. 

They’re not half the buying market, but they’re close to it. Because they’ve owned property for a while and built up equity, they’re financially strong. And they’re aspirational, so they’re highly motivated and will often pay whatever it takes (within reason, mostly) to secure that one property they must have.

They’re the sneaky bastards who force prices to rise. And there’s almost nothing politicians can do to stop them.

Terry Ryder is the founder of hotspotting.com.au. You can email him or follow him on Twitter.