Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Pop goes the housing bubble!

By Peter Saunders - posted Friday, 18 March 2005


The house price bubble has finally burst. While it lasted, the boom added substantially to the wealth of existing home owners, but it has made home ownership more expensive for aspiring new buyers.

In its aftermath, three questions arise. First, who financed the capital gains that home owners have enjoyed? Second, has home ownership become unaffordable for the younger generation? And third, what, if anything, should the Government be doing to help young families get on to the home ownership ladder?

Around two-thirds of households own their own home, either outright or on mortgage. For most Australians, the doubling of house prices had a major impact on personal wealth holdings.

Advertisement

It is sometimes argued that capital gains from the housing market do not represent real increases in personal wealth because owners cannot get their hands on the money, and even if they sell, the cash has immediately to be reinvested in another property which has inflated at the same rate. But capital gains create real wealth differences, irrespective of whether they are liquified.

One of the key sociological developments of our time has been the emergence of a division between a majority of families who are accumulating wealth through home ownership and a marginalised minority who have few assets, little material stake in their society, and no realistic prospect of accumulating wealth or passing it on to their children.

The growth of personal wealth through the housing market has many positive effects. It means families can reduce their reliance on government and strengthen their financial and personal security. They can help their children and grandchildren get a decent start in life, they can use their assets to start up businesses or as collateral for loans, and they derive pride of ownership and an enhanced sense of personal achievement and autonomy from having a home of their own.

But the sorts of capital gains we have seen in recent years also have a downside. Rapidly rising house prices make it more difficult for non-owners to get a foothold on the property ladder. And new buyers who have bought a home may have over-stretched themselves, for debt levels are at record heights and a future rise in interest rates could generate severe hardship.

Rapid house-price inflation also has wider economic costs, for it can distort the way we use capital. Young workers rush to take out huge mortgages before house prices spiral out of reach, and older buyers are seduced into investing in rental property while disregarding falling rental returns.

Just as damaging in the long term are the sociological effects of high house-price inflation. When passive ownership of a house delivers riches far beyond what most people could accumulate from many years of working and saving, traditional virtues emphasising hard work, saving, enterprise and deferred gratification are likely to get eroded. Yet these are values on which capitalist liberal democracy ultimately depends. The latest housing boom has left new and recent buyers stretched and vulnerable.

Advertisement

There is not a lot that government can do about this, for the key factors in the boom have been the shift to low interest rates and changing demographics, and both of these are beyond the control of our politicians. But governments have had some influence on house prices as a result of tax, spending and regulatory activities, and there is a strong case for reviewing policies in these areas.

The argument for abolishing the First Home Owner Grant seems compelling. There is also a pressing need to increase the release of new development land, and to change the system for financing new infrastructure. Tax changes, too, are warranted. In particular, negative gearing could be ended in return for a radical reduction in marginal income tax rates and a long-overdue simplification of the personal tax system.

Capital gains arising from home ownership are a major vehicle of wealth accumulation for ordinary people, but they should not be underpinned by governments at the expense of those still trying to gain owner-occupation.

  1. Pages:
  2. 1
  3. All

This article was first published in the Adelaide Advertiser on March 16, 200. It is an edited extract of an article in Policy quarterly magazine.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

6 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Peter Saunders is a distinguished fellow of the Centre for Independent Studies, now living in England. After nine years living and working in Australia, Peter Saunders returned to the UK in June 2008 to work as a freelance researcher and independent writer of fiction and non-fiction.He is author of Poverty in Australia: Beyond the Rhetoric and Australia's Welfare Habit, and how to kick it. Peter Saunder's website is here.

Other articles by this Author

All articles by Peter Saunders

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Peter Saunders
Article Tools
Comment 6 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy