The property boom makes homeowners rich with a huge increase in the value of their homes and rental income return. Potential first home buyers and renters have become poorer in this recent booming property market.
However, it’s not that rosy for homeowners as many properties have not increased in value for over 10 years. Most properties that were purchased in 2010 had not increased in value by 2020. Then the property boom increases the value of property by say 25%. That’s a 25% capital increase over 10 years, or 2.5% per year. Not really a great result for homeowners or property investors.
Don’t forget that rents didn’t increase with inflation over the same period. However, property expenses and taxes have risen over that 10-year period. Council rates, water & sewerage charges, caretaker fees, property management fees, homeowner’s association fees, insurance and other maintenance charges have all increased. Property investors were squeezed by rising costs and no rent increases.
In 2022, property prices boomed, and in 2023 rents are increasing to be commensurate with the new value of the property market. Property investors are recovering ground but certainly not profiteering.
How a Property Boom Works
When the property market booms, residential land prices increase first driven by strong demand for building blocks. Vacant building blocks sell out quickly leaving prospective home purchases no other option but to buy rather than build.
Next the demand for single family homes out paces the market supply. As house prices increase, prospective home buyers panic and try to purchase a home before the prices rise any further. This creates more demand that drives up prices in a highly competitive market. Real estate agents make huge commissions for doing little real work. They simply become order takers, who dress in suits and drive nice cars.
When there are fewer houses listed on the market, townhouses and apartments become hot property. Purchasers begin to pay record prices and drive up the market.
Eventually, when prices are much higher and more listings come on to the market, demand returns to normal levels and prices stabilize.
However, that’s not the end of the story.
Rents, particularly for townhouses and apartments, are mostly based on the value of the property. If the property boom in sales has driven prices higher, rents will increase by the same amount. For example, property prices have risen 20%, rents will also rise 20% to be commensurate with the value of the property.
This is bad news for renters. Not only have they had their dreams of future property ownership crushed but now they have to pay more rent. Saving that first home deposit just became much more difficult.
Property Prices is Driving Wealth Inequality
Low-income earners (or the working poor) are spending a higher portion of their income on housing costs and saving less money for their retirement. This will become a future problem for governments that will need to fund these people when they are no longer able to work.
Governments may increase basic pay rates and improve workers conditions so that low income earners can keep up with the increasing cost of living, but what about house prices?
Rising house prices and plummeting rates of home ownership are opening the gap between the rich and poor, driving up wealth inequalities.
Capital Income is Increasing Inequality
There is an escalating divide between property owners and non-owners which is being exacerbated as wealth is passed down to the next generation.
And with the population living longer, the average age to receive an inheritance is much later in life, in the fifties and early sixties. This is much later than when the money is needed to fund real estate purchases or pay for the children’s education.
The result is that the older generations have all the wealth and can pass on significant inheritances to their children. Some children of wealthy parents live in rental properties until their parents pass away and leave an estate. The children may inherit several properties and enough wealth to retire from employment immediately.
The other issue is that the older property-owning generations produce all the capital income from investment properties. The proportion of rental income has grown to be a larger capital income component of the economy. In 2022, in many major cities, the median home generated more rental income and capital growth, in a year, than the median full-time worker. Of course, this is not the case when property prices are not increasing but on average over the longer-term real estate increases in value and produces rent income that is more than the earnings of a median full-time worker.
Build More Houses to Reduce Property Demand
With increasing immigration fueling population growth, there are not enough houses being built to meet the demand. And with property price growth and generous tax concessions, houses are purchased by investors to generate future wealth. This reduces the number of homes available.
The real issue with building houses is there is not enough developed land.
Go out and try to purchase a building site to build a new house. Land has become scarce and expensive.
Individuals may be able to build a new home, but you cannot build an apartment building or town homes. We have to wait for property development companies to construct buildings and communities.
How to Purchase the Right Property
Reduce Immigration Level to Reduce Property Boom
It makes sense to build more homes to meet demand and stop rents escalating to unaffordable levels. However, shouldn’t we scale back immigration until the housing market supply catches up with demand.
Houses take time to approve and develop. Immigrants can arrive quickly to fill employment market demand but where are they going to live? How are they going to afford the high cost of living?
Do immigrants really understand our high cost of living and expensive home market?
Do they realize they may never afford a home, educate their children, or live comfortably in retirement?
Or are they just wanting to get away from their own country with its own problems?
Most immigrants would not want to emigrant to another country to cause problems in their new country. They would not want to leave their home country to become the working poor in another country? Surely, they want to immigrate to have a better lifestyle, employment, home, health care and future for their children.
And we don’t want to make them worse off than they were in their home country.
Immigration should be reduced until the property market has cooled down and stabilized.