Australia’s housing market is now worth a staggering $6 trillion. That’s a good thing right? Not according to the RBA’s Deputy Governor Phil Lowe.
In a speech last night Lowe addressed Australia’s obsession with housing as their primary wealth generator. In doing so, Lowe highlighted that our “fascination with housing is really, mostly, a fascination with land.”
He adds that “(what) is perhaps more remarkable is the extra resources that Australian households have used to purchase, from one another, the land on which these bigger and better dwellings sit. Indeed, most of the extra money that has gone into residential property has not gone into the physical stock of housing, but rather into land.”
That’s important because it has made the ground on which our houses sit more valuable. In doing so it has made the owners of those households wealthier. That’s okay.
It’s only okay up to a point, Lowe says, because housing costs should represent the net present value of what housing will cost in the future:
If housing is fairly valued – in the sense that the price of housing is equal to the present discounted value of the future rents – then the rise in prices implies an increase in the expected future cost of housing services.
So, from the perspective of society as a whole, much of what is gained on the one hand is lost on the other: there are windfall gains from higher land prices but then everyone pays more for housing services.
In other words, Lowe said, you end up with an intergenerational transfer of wealth. As a consequence, the problem of expensive housing gets handed down from one generation to the next.
“It is arguable that the main impact of higher land prices is not really to increase our national wealth, but to change the distribution of that wealth,” he said.
However, what he also said was that because the rise in value had been driven by increased borrowing capacity and debt on Australian household balance sheets, these households were now more at risk of financial calamity.
And, importantly, they know it.
The rise in land prices that I have spoken about is inextricably linked to the rise in household borrowing…
We are still trying to understand fully the implications of all of this. However, I think it is difficult to escape the conclusion that household balance sheets are, on average, a little more risky than they once were. Many Australian households also seem to have reached a similar conclusion. This is reflected in the decision by many Australians to take a more prudent approach to their spending over recent years.
That’s a good thing, Lowe said, adding, “I suspect that it is unlikely to be in our national interest for this more prudent approach to give way to household consumption once again growing consistently much faster than our incomes.”