Australian columnist: maybe our housing bubble is not a good thing.

From the National Times:

WHEN house prices soar, you can hear the silent cheering all around you. Most of us own homes, so rising prices increase our notional wealth. They mean someone else will have to pay us more in future to buy our homes.

Market analysts and the media bombard us with data on what are the ”best-performing suburbs” – meaning the suburbs where prices rose most. They see it as self-evident that rising prices are a good thing – and the higher, the better for us.

Well, sorry, but they’re wrong. Rising prices may be good for those of us who own homes – but far less than we assume. And they are not good for ”us” as a society.

Let’s be blunt. No social change in recent times has done more to make younger Australians worse off than the waves of house price rises since late 1987, when Labor restored the tax break for negative gearing.

Since September 1987, the Bureau of Statistics tells us, average house prices in capital cities have risen by 433 per cent. In other words, a typical house that was an affordable $100,000 in September 1987 cost $533,000 by December 2009.

But haven’t incomes risen too? Yes, they have: but by only 195 per cent. So if a typical household had a disposable income of $30,000 in September 1987, it has risen to $88,500 now. (There are no figures for median household disposable incomes, but these are in the right ball park). The cost of a typical home, in this example, used to be 3.33 years’ disposable income. But now it costs six years’ income…

…Rising prices are inflation. We don’t think higher petrol prices or higher fruit prices are a good idea, although they certainly make someone better off. Why do we think inflation is such a good thing when it applies to owning a home?

This is one area of policy where government intervention has made things worse for the group they say they want to help: aspiring home owners. That is clear from the sharp fall in home ownership among younger age groups (indeed, among all age groups under 55). (cont…)

The author makes some good points, such as calling asset prices inflation (they are indeed a symptom of inflation, an expansion of money and credit), but he doesn’t seem to get that prices can form bubbles and crash without any changes to the tax code or the traditional supply/demand curve. What matters is cheap credit made available by the moral hazard extended to banks by the existence of a central bank and its ability and willingness to print gobs of money and bail them out.

Break up the cartel and allow a free banking system, and bubbles would be localized and contained by bank runs and the mere risk of bank runs. Bankers need the “fear of God” as on old-time chairman New York’s Chemical Bank put it when asked how he managed to redeem his notes in gold and silver through panics that sank so many others.

About these ads

3 thoughts on “Australian columnist: maybe our housing bubble is not a good thing.

  1. A free banking system!! Let people decide for themselves whether they want to take risk or put their money in a full reserve bank.

  2. It was Thomas Jefferson who said that a National Bank (the FED) would be more dangerous to our liberty than a standing army.

    We now have both.

  3. Mike-

    Checked out – it looks great. I hope you are planning on going thru the “alternative investing” sites to promote it. Perhaps a brief article explaining the site, its inspiration and future vision? I am sure, and (among others) would be interested, as would their readers.

    I am glad a deflationist is getting ready for what may one day soon be the biggest and fastest bull market since the late days! As you know, I am pro-Gold and recognize deflation as a bonanza for Gold miners as long as one accepts that Gold is also money/a currency and not just a commodity like copper or oil.

    Anyways, best of luck with the endeavor and I’ll obviously give it a plug in my little neck of the woods!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Connecting to %s