House your enemy

In Australia we have incredible wealth.

Decades of improving productivity combined with a continent’s worth of resources has meant that wealth as measured by assets per person has just continued to increase.

A large fraction of that wealth has been sunk into real estate.

Quite bizarrely we have mostly chosen to live in a handful of cities, and this has led to incredibly high real estate costs driven by a permanent under-supply of housing.

That money that is sunk into real estate, where does it go?

There are buyers and sellers and then there are also service providers such as real estate agents and builders.

The latter group get to make their own contribution to the market by sinking their own wealth back into real estate; they know no better.

In the main there is very little free cash flow coming out of the real estate market.

Sometimes someone might cash out and spend that cash on lifestyle choices or business, but this is rare. Generally reinvestment into the same market is the norm.

So the winners are the financiers, the banks, that borrow cheaply overseas and lend that to us for real estate purchases at nice margins.

The local beneficiaries of their success are their employees and shareholders who, guess what, invest much of their wealth into the same real estate market.

If the country had a balance sheet there would be this real estate line item just sucking up all the cash flow and continuing to appreciate as an asset. Zeros building up in holding accounts – that’s all we get for our efforts.

One of the issues is that the supply-limited real estate market is there on ‘purpose’; it is good for the banks, builders and agents – an unholy interest group that can influence local and state governments to maintain the supply side issues in order to maximise their profits and minimise their efforts.

We would need city-wide governments, free of state governments, to fix this supply side issue in our existing cities.

Even if we had city-governments the problem would continue to exist; the population pressures we are going to face in the future would out-race even the best planning within these cities.

What we really need is new cities. We need to take cities such as Newcastle, Coffs Harbour and even Nowra and actively turn them into business centers with populations of more than 1 million people.

The more free cash in an economy, not tied up in real estate, the likelier it is that there will be risk capital available for investment into the development of new export industries.

And superannuation is not really free cash – because of certain tax benefits it naturally avoids certain higher risk activities.

But, in any case, the idea that we let people take super out early and invest in real estate, as Joe Hockey proposed this week, is simply retarded. It would make things just that much worse than they already are.

If real estate prices ever drop across the board we are going to have a real issue of our own making. But it’s probably the correction we need to have.