The House Always Wins

There's something epic about the buying and selling of houses. In most countries anyway. Peoples' own piece of Earth they get to own and live on, it's a deep emotional need shared by many, and an understandable one.

The problem with this deep feeling for our territory is that we made a market out of it. We made this deep emotional need into something we buy and sell, to make a buck. In the process we tapped into another of our deepest, primal needs - the need to feel secure. On the surface this need seems more like the desire for wealth, and that could be considered an independent (and also deep) desire. But much of the desire for wealth relates to the desire for security too - if you have lots of money, your life is financially secure, and that is a lot of what feeling secure means to many of us, and rightly so. If you're not having to worry about where the next meal is coming from, and paying the bills, it surely is peace of mind.

So we've hitched together 2, or maybe 3 (if we count the desire for wealth alone as a third) primal needs into an explosive amalgam. One where each reinforces the other. We want our place to live, and security and money, and the housing market gives us all 3 in a nice bundle.

Unfortunately this bundle has now landed most of the 'developed' world in the shit, and not for the first time. The US and much of Europe, as well as Japan and other parts of Asia, are crippled by unimaginable levels of debt. Not government debt, as some would have us believe, but by private debt. And most of that private debt is - you guessed it - tied up in our houses. Often you'll hear how 1 or 2 trillion dollars have been used in the US or Europe to try to kickstart their economies, and we gasp at those numbers. But in the US alone, for example, and this is hardly ever mentioned, private debt is running at around a staggering 42 trillion dollars. And much of that is mortgages.

That's why economies the world over are on their knees, people ran up huge debts in the exuberant years between the mid to late 1990s and about 2007/8. They bought houses, for all the 3 deep primal reasons listed above, with the help of cheap money (low interest rates), and inflated one enormous property bubble after another, in just about (if not all) of the affected countries. A 'bubble' being where people start to buy and sell the houses purely for speculative gain, bidding prices up with the cheap money on the expectation they can sell and make massive capital gains. No relationship whatsoever to any sort of reality of whether a house or land was worth the money being spent on it - what real estate agents and the rest of us call 'the market' is nothing more than "what people are prepared to pay." And when money is cheap and everybody is whipping that bundle of 3 deep needs into a continuous frenzy, what people are prepared to pay skyrockets in very, very quick time. So prices go off the scale.

Here's some data for towns around here which bear all of this out. Courtesy of http://www.propertyinvestor.com.au/house-prices/?suburb-lithgow-2790 (go there and put in your own suburb/city/town, it makes for fascinating reading). Hopefully the figures aren't too small to see.






Every town tells pretty much the same story, and it's a story that is repeated across the entire country. The years 1994-1999, roughly, were before the current property boom took off. Before the 3 desires bundled together so passionately. So those were 'normal' times in housing, with small gains some years, small losses in other years, but overall prices don't move a lot.

Yes your parents and real estate agents and friends might have said "housing is a good investment, it cycles up and down all the time but over the longer period it always goes up." The tragedy of this bullshit advice is that it's just that - bullshit. You can study house prices as far back as 300-400 years in some countries, and in every case the prices, over the longer term, don't move an inch. The prices may look higher over time, but once you take inflation out of the picture they don't - you'd be lucky to ever make more than a few percent out of an investment in housing, when you look at the longer trends. You make more money out of depositing your money in a simple savings account in the bank (I want to do a post on exponential growth at some point that helps to explore why that's inevitable).

Look at those figures above. Lithgow for example, in 1994-5 the average price for a house was around $80,000. Now it's over $250,000, in less than 20 years. That's an increase of more than 200% to the average, in that tiny amount of time (more than 10% a year). Any financial advisor who tried to sell you an investment that made more than 10% a year would be considered a con artist, but those 3 deep desires in us that all converge around the housing market mean we turn our brains off completely when those numbers appear there.

And look at the actual numbers in tables that go to make up the graphs. The usual (bullshit) line about housing always going up in value - have a look how many of those years between 1994 and now actually had any serious price growth. Only the years between about 2001-2004, when the orgy of get-rich-quick housing speculation reached its orgasmic peak. More than 20% hikes in prices in some of those years alone, when Peter Costello and John Howard were trumpeting about and taking credit for the booming Australian economy, which in reality was just this mad housing speculation. All funded by private debt, egged on by the banks, the country was awash with the money from this orgy of buying and selling, everybody felt bloody terrific. So you could look at the difference between 1994 and 2012 and say "you see? Housing does go up in value over time." But it didn't, it went into the stratosphere in those few short years and has limped along ever since, ready to explode and head back down the other way.

Because it will head back down, it's started already (use the link above to see how things are going where you live). Just like everywhere else in the world - the US, and now Europe, and Japan already in the 1990s. Japan is still a zombie economy, they never recovered. Housing doesn't go up in value in some nice gentle way over time, it keeps the same value, and then occasionally we have these orgies of excess, we get a bubble, the bubble bursts or deflates, the economies crash, and we go back to where we started. And we never seem to learn.

Australia delayed the day of reckoning because of Kevin Rudd. His stimulus package in 2008 prevented the bubble here from bursting - a large part of that stimulus was grants to home buyers. But it was tiny compared to how much all of those mortgages really add up to. We're just as screwed as the US and Europe. When the housing market goes back to its longer term average here, it will bring the economy down with it. Because it's what made us boom. Not mining (and mining only boomed because housing in China has a bubble too - you'll ALWAYS find a bubble where things look too good to be true). Mining contributes only small amounts to the overall Australian economy, despite what miners want you to believe.

When the housing market really tanks, whether slowly or quickly (and it has started to, everybody acknowledges now), don't blame the current politicians, from either side. If you want to blame a politician blame the ones in power when the bubble inflated, in the late 1990s to about 2007. The ones who have been crowing ever since about what splendid economic managers they were/are. And the banks who flooded the market with cheap money.

But also we need to all blame ourselves, to the extent we bought into the housing market get-rich-quick myth. I don't expect the myth will die, meaning we'll all be back here again in 20-30 years time. Just as we were here in the 1980s.






Comments

  1. all that without even visiting the ridiculous idea of legislation that encourages people with too much money to purchase over-expensive houses specifically for the purpose of offsetting tax.

    ReplyDelete
  2. Too true. The bizarre tax rort which helps people who already own a home to buy 1,2 or 3 more, while doing nothing for the person who doesn't own one at all.

    ReplyDelete

Post a Comment

Popular posts from this blog

The Morality of a Speed Bump. Latour.

Reductio Ad Hitlerum, or what's wrong with Godwin's Law

Counterpoint (P.S.). Queen.