Unintended consequences?


A lot of complaints from the “guardian” class of people seems to centre on the terrible exploitation of others by property owners who rent out houses. Theres also the same level of wailing about how expensive property has become due to investors buying up/renting out most of the cheaper housing stock.

I have a theory on this, and would invite anyone to pick it apart.

Most property investors are the “mum&dad” type, not educated enough or comfortable with either stocks, money managers or “exotic” schemes.

At the same time inflation, over 10 years,  of around 2.5% per year sees them loosing around 35% of that “saved” money if they were to stick it under a mattress, or slightly (very slightly) less if they banked the money.

Heres the Wiki figures, tell me why (in the absence of a crash) you wouldnt invest in real estate in Australia?

Between 1998 and 2008 inflation was about 36%[30] yet property prices inflated by more than 300% in all capital cities except Melbourne (up 280%) and Sydney (up 180%)

So given cash goes backwards, most investments have an element of risk, lack of control or both where is an average person to invest their money? Housing in Australia is a rather large bubble waiting to burst, but the government isnt willing to risk deflating it anytime soon. A reflection of how much is tied up in housing can be seen by the devastation in America, where it was largely residential homes that triggered the financial crisis.

 

Australia treats property investment much different to nearly any other type. Live for a few years in a house and when you sell it, the profit is taxed at a massively lower rate than any similar item sold.

I blame the taxation system for the massive overinvestment and price bubble in Australia. The desire was good, more properties available for renters, more small investors, but it has become a monster.

Im not calling for a swathe of new taxes on housing though, but a realisation that the investment market is massively distorted  by the taxes levied on every other type of “ordinary” investment. If, for example the government was to cease taxing bank deposits the “average” investor might begin to see that as an attractive and less risky proposition to investment housing. Again this might begin to distort the flow of money, but I think its time the housing bubble was deflated softly in Oz, rather than allowing the upwards spiral to continue.

The problem isnt “greedy investors” its the inevitable result of the government taxing most other “unsophisticated” investment options. If they were to lessen taxes on other investment options it might take a lot of the heat (and the huge risk building) out of the housing market.

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