Property is a ponzi scheme
It wasn’t always like this, at least not for as long as I remember. I’m watching this great catastrophe happen in front of me and I can’t help but feel helpless.
Let’s first rewind to when being a ‘millionaire’ was something to aspire to. Having a million dollars meant you could do nearly anything you want. My memories of this feeling was in the late 90s and probably crept into the early 2000s.
The internet wasn’t a popular thing and the television was where you got most of your external information from. As the years past and we became more online, housing became a hot investment which was suppose to ‘crash’ multiple times in the past but it’s been a train that seems to have unlimited supplies of fuel.
Stability in the world/country
Thirty (30) year mortgages are the norm. The state of the world is in a much better place than what it’s been in the past. I couldn’t imagine a bank giving out a 30 year mortgage with a world war on the cusp or a civil war breaking out in Australia.
There’s generally stability in the environment here, with the exception of an occasional drought or bushfire that affects mostly country towns in Australia. The cities are fairly isolated from these kinds of natural disasters as well. Australia doesn’t have any major fault lines across the continent, nor do we see large hurricanes, tornadoes or cyclones rip through our towns.
There’s barely any snow that hits the continent either, it just so happens to be very dry is all with a natural hot desert in the middle of the country. Our size is both a blessing and a curse as it acts as a natural buffer, but means we have to cover lots of dirt and non-habitable land before getting somewhere.
The generally more stable southern hemisphere weather also means that wear and tear from the weather is less severe (think ice crystalising which breaks down compounds and materials faster) means that things will deteriorate slower in southern hemisphere climates than northern ones.
Australia is also not located on a fault line (like Japan, New Zealand or West coast USA) so we’re not going to have massive landslides, tsunamis or earthquakes which take out our population regions.
Rise of cheap credit
It’s become so ‘normal’ to see prices go up and people continue to pay off crazy high mortgages. Banks can hand out these high mortgages, even if people are stretched to their limit trying to make the repayments - they can always reposess and sell the property if the owner cannot make the repayments so the risk for them is small. As we’ve seen with housing as well, the value of the properties have continued to grow and they’re more than happy to lend you the funds.
The banks can never fail. They are a business that can always draw more money from the federal reserve / government. With this kind of confidence, there’s no wonder housing prices continue to grow. But at the end of the day, the banks are simply entities that are controlled by people.
Banks want to increase their profits by handing out larger home loans, the government don’t want the banks to fail so they enjoy seeing the profits continue to rise. It took a royal commission into banking for governments to investigate any potential wrong doing by banks and this barely made a dent into solving the housing affordability issue today in Australia.
Ponzi scenario at play
Lets start with a generic bank we’ll call B. B has unlimited credit and is more than willing to give out loans to people as B has an implicit agreement with the government to be bailed out in the event people start defaulting on the loans. This makes property a very safe investment for everyone as there is no longer any risk from buyers or banks like B as the government can print as much money as it needs to cover any losses incurred by B.
A property investor enters the market - this person has good credit history and proven stable employment over the past few years. Bank B begins handing out mortgages to said investor and they accumulate a number of additional properties, all within their financial means.
Year over year property investor sees his investments pay for themselves through the rental income their properties return. In fact, over the years interest rates have dropped, the value of the investment properties have increased and the investor is able to continue redrawing funds to further increase their investment profile.
If we stretch our imagination and assume that the interest rate could dip below zero and prices continue to rise, we can see how the property investor can continue to grow their profile indefinitely without ever needing to sell off their investment.
I believe this is what’s happening, with the richer portion of our society having no incentive to sell off their ‘investment’ and put strain on the property market by eating up all the supply in this manner.
Solutions to the problem.
- Stop cheap credit
- Cap on the number of investment properties a person can own
- Prevent any foreign ownership / investment into property ownership
Both of these would literally be stealing from the rich and giving to the poor. It would make housing more affordable for everyone and provide those who are life long renters the ability to actually buy a property to live in.
It’s quite a dangerous and disliked approach as those in power stand to lose the most. Without some serious voter buy in, we’ll eventually price out most people from the market and have a society of super-rich and then everyone else with a non-existent middle class.