27 Aug Will the Australian housing market collapse?
I am not an economist I am a poet and as part of being a poet I spend time researching how things work (or don’t work) in the world. This is how I come up with the ideas for my poems. The two books I have recently read are Payback (Debt and the shadow side of wealth) by Margaret Atwood (award winning author) and Talking to my daughter about the economy by Yanis Varoufakis (world-famous economist and author). Oh, and also just for fun, the Handmaids Tale by Margaret Atwood so actually 3 books but the inspiration gained from that one will have to wait for another blog article.
Now I will try and use the knowledge I gained from these books about market societies to try and understand a current pressing issue in Australia. This being housing affordability and the great divide it is causing between the have’s, and have not’s. I give full disclosure of my absolute lack of qualification because I want to make very clear that I am not writing an advice piece, rather this is just an indication of some of the reading and research I have done as I have looked to understand the market society that we are all born into. Also, I am trying to take the opportunity to say hey, why don’t you also ask this question and look for the answer. The economy after all is something that greatly shapes all our lives, and is not so hard to understand that it must remain a mystery so really don’t you just want to know more?
The first thing I would like to address is inflation and deflation, because like me you may only have had a vague understanding of what these terms mean and how they affect a market economy. Stay with me don’t hit the snooze button just yet, I will get there as painlessly as possible.
When someone is talking about inflation and deflation they are talking about the “exchange value of money” (Varoufakis 2017, 142), in reality this means “its relative abundance or scarcity” (Varoufakis 2017, 143) or in my understanding lots of money circulating or very little money circulating.
Inflation – Is created by more money being put into the system increasing trading capacity within the economy. The more money in the market the less it is worth and so prices go up.
Deflation – A decreasing amount of money being distributed in the economy. Less money to trade with causes it to be worth more so prices drop as its worth increases. Wage stagnation can cause this but so can lack of available credit. “Debt comes before surplus.” (Varoufakis 2017)
Thinking in terms of housing if wages go up purchasing power can increase and so can the availability of credit this then causes house prices to increase as the value of money is decreased (being a millionaire really doesn’t hold the same value as say forty years ago especially because if you bought property in say Sydney back then and have paid it off then you are in asset terms probably a millionaire along with many other baby boomers and mostly due only to inflation). The amount of money circulating within today’s system has partly increased due to the housing boom in Australia.
When wages stagnate then an opposite force of deflation can begin to appear as there is less money being recycled (recycled; meaning money being spent not saved, a term borrowed from Varoufakis 2017) into the system and its exchange value goes up causing prices to go down. The less there is to trade with the more the trading tool (money) is worth and the more there is to trade with the less the trading tool is worth. Currently we have these two influential commodity prices (labour and housing) at odds with each other.
Yanis Varoufakis in his 2017 book Talking to my daughter about the economy; better explains this in the context of his example of the POW camp where they used cigarettes as the currency to trade for other things like chocolate, coffee or tea. So, I will borrow a bit from him, if in the camp each prisoner gets say 10 cigarettes, 200g of coffee, 20 tea bags and 200g of chocolate and the prisoners want to trade amongst themselves they work out prices to help trading go smoothly and as such they create a market price for their items. Remember the cigarettes are the currency (money) in this equation. So, they may start with something like 2 tea bags is worth 1 cigarette, 50g of coffee or chocolate. But as markets are subject to change what happens if say the next month extra cigarettes are delivered and the prisoners now have 20 cigarettes to trade with, the cigarettes lose some of their value due to their ‘abundance’ so now their trading power has decreased resulting in paying 2 cigarettes to get the same 2 teabags and so on. Then the opposite could also happen if say at the end of the month there are less cigarettes circulating because they have been smoked. This would create scarcity, which means their value goes up, trading power increases and the same one cigarette may now buy you 4 tea bags. The scarcity caused the price to change as trading power increased. What we gain from this example is that exchange rates fluctuate due to the supply in the market of the currency.
However, be careful to watch out for how easy it is to misunderstand this, as is often the case when people think that more land released will lead to cheaper and cheaper prices. Although true to a certain point this does not convey the whole picture and process. It often starts with a statement like this; releasing more land for development will make it cheaper. New land releases certainly start off with cheaper prices, then comes the second land release and prices have elevated slightly, third land release and you can’t believe you missed the first because now prices are really starting to soar.
So, what happened here to cause this after all wasn’t more meant to mean the value went down? The answer is yes, but as mentioned earlier under inflation if the supply of the commodity goes up like in the POW camp with cigarettes then the cost of the commodity goes up too as the trading power has increased causing the exchange value to inflate the price. The driving force behind this is the huge injection of money that came from all those new loans being granted. The new loans have generated a means for inflation to occur as now there is more money in the overall system (the economy) and the price of houses go up NOT down which is commonly misunderstood. This can mark the emergence of a bubble, especially when it does not stay relative to other commodities.
Until the point of over supply takes over and then either there are not enough people to buy the properties as in the 1890’s crash or alternatively a situation like today where inflation has caused prices to go up so high that potential buyers are priced out of the market. Either way the market for land will be slashed and house prices crash due to being overleveraged on credit that cannot be repaid due to the loss of customers. So yes ultimately more land supply allows for prices to go down but only at the very beginning and the very end of the cycle.
It is important to understand inflation and deflation should correlate with interest rates. For that lets look again at the example of the POW camp. As Varoufakis tells us even in the POW camp they created bankers.
If a prisoner acting in the role of banker is offering an interest rate of 20% as Varoufakis explains but expects a larger shipment of cigarettes to arrive next month causing inflation by the exchange value dropping by 10%, then to keep his profit at the same level he must then raise his interest rate to 30%. As his profit would be calculated by the ‘real interest rate’ being 20% minus 10% (due to inflation) adjusting the profit down to 10%. The banker then to maintain the profit margin increases the interest rate to 30% so that it is 30% minus 10% thus maintaining the 20% profit. This is how interest rates are meant to work if undisturbed. Undisturbed by outside influences is the important part to take note of here.
The difference between the real-world economy and the POW camp economy as Varoufakis points out is that the POW camp operated without outside interference. Whereas the outside world economy has many interferers.
It is worth noting that even though low interest rates can seem like a great opportunity to borrow money at a low cost what they can sometimes represent is a deflated or deflating economy (sometimes interest rates are deliberately reduced to try and stimulate the economy by increased spending generated by borrowing credit) and this is not necessarily a great thing if you get caught holding the commodity that is about to tank, actually let me correct that, holding the commodity while still owing money on it to be more precise. In other words, sure borrow while it is cheap BUT make sure you also pay it back while it is cheap don’t keep borrowing with the expectation that this will be the rate forever.
Because as you borrow this stimulates the economy to grow as the loan has increased the amount of money now circulating. The borrower has inadvertently caused inflation. This is also why it is not a strong financial position when you borrow to your maximum capacity of repayment when interest rates are low. Currently 1.5 million Australian households have this type of loan in the form of interest only loans that they may find very difficult to repay at a higher rate (Fitzsimmons & Pedersen-McKinnon. “It’s our version of the GFC warning on looming interest-only crisis.” SMH, July 21, 2018). Under these circumstances, banks may choose to limit credit availability (as we have seen recently) in an effort to curb inflation but this can only be a temporary stop gap measure if the balance is too far out of alignment.
Now I know you are thinking why then is it that we constantly hear that inflation is low even though housing is high? Well from what I understand of this is they are talking about the Consumer price index (CPI), which yes is meant to be in theory a good indicator. However as previously mentioned the world economy does not operate in the bubble of the POW camp as it has outside disruptors. In this case CPI doesn’t really relate well to the real world as it is a bit like a mixed basket of mystery. As CPI is made up according to the persons putting the commodities in the basket at any given time even though they use a formula the formula is subject to change at the discretion of the disruptors within the system. Due to this it can have huge variations in composition and discrepancies emerge rendering it fairly useless tool for measuring inflation in real terms. In other words, it may not relate well to the real economy you live in. Because when they say inflation is low you cannot be guaranteed they have included things like housing in the basket and even if they have, have they given it sufficient weight as a percentage of the basket makeup, who knows it is subject to change and this is not mentioned nor the formula revealed at the time of stating the CPI. Unless you look it up each time it is unclear how relatable and therefore useful as an indicator of inflation within your life.
Here’s an example that illustrates just how useless this tool can be in real terms; I rented a 3 bedroom house for $180 per week in 2000 and inflation rates according to CPI have on average sat at 2.63% for the period of 2000 to 2017, twice going as high as 5 per cent over this period (ABS). We can take the rent I paid in 2000 of $180 and for the purpose of this equation I will use the average inflation for the period of 2.63% to compare what CPI tells me the rent should be today to what realestate.com tells me I will actually pay. To do this calculation requires a simple maths equation of $180 + 2.63% = $184.73 (this gives me the amount after rent increase for the first year according to CPI). I then take the $184.73 + 2.63% = $189.59 to get the second year increase and identify what I should be paying according to CPI by the third year and so on. The process must be continued 17 times to arrive at what should be the market price for this rental come 2017 in relation to what CPI tells me. FYI the short version of this equation is $180 + 55.52% equalling the grand total of rent that should be paid by 2017 of $279.94. Anyone out there still paying this for a 3 bedroom? (only a very few I suspect). In any case a look on realestate.com tells me that this property would now net a rent price of approximately $750 per week.
What this tells me is that the CPI is completely off when it comes to being able to gauge true inflation in real terms even for one of the most essential items like housing, which I would think should rank high enough in the formula basket to give a good indication of where inflation is actually sitting. For fun try also using this formula on your electricity bill and again you will see how it falls short of being a good indicator of overall inflation within the economy you live. The sky-rocketing cost of living doesn’t lie but the CPI might when it relates to inflation. Now it is obvious that I don’t completely understand how CPI is calculated, but what I do understand from real-life experience is that it doesn’t relate well to how inflation is affecting me. I realise that the rebuttal for this will be something like my experience is too narrow and the CPI is looking more at the whole, to which I would counter with maybe that’s true but what use is it to me if it doesn’t correlate with my real life experience for isn’t its purpose to represent real life inflation in the economy?
For me I just find CPI useless as a tool in my life but take it as you will for your own, I just encourage you to do the maths first.
The other indicator that is often used to measure the health of the economy is Gross Domestic Product GDP. Like CPI though I find it to be useless and here’s why; “It is fundamentally flawed as a measure – because it counts financial transactions only, it ignores significant areas of activity” (Lowe 2016, ) Professor Ian Lowe goes on to explain this by comparing domestic tasks with commercial, in this example if we are a carer for a loved one even though this activity is hugely valued within society it does not count towards GDP. “However if a person brakes the headlights on a car this is counted towards GDP and therefore if they were to smash every window as well they would be a minor economic miracle” (Lowe 2016, 145). What he is clarifying here is that GDP only measures activities within society that have been commercialised irrespective of whether they have consequences that are harmful to people. When this happens, they are unable to indicate the true health of the economy because they are disregarding the health and well-being of the people. They do not predict or pick up on the fall out that may come from spending on things that have caused harm to people and the economy needs people to even exist. In this way it is a short-term view of spending that doesn’t account for future turmoil that may be caused by the type of spending that is occurring. In the most extreme example war is good for the GDP but just wait for the impact on human lives before you go announcing that the economy is doing great because GDP is high.
I will now take you down a little history road trip just to point out that Australia has in fact had a housing collapse in the past. This will tie into the boom and bust economic cycle that we have created.
1890’s depression and the largest housing crash in recorded Australian history.
Gathered from RBA Two depressions, one banking collapse authored by Chay Fisher and Christopher Kent, June 1999:
- National investment grew in the lead up
- Wealth gained by agricultural and mining allowed for the money to be transferred into the cities
- Need for housing increased as population boomed at a “rate of 3.1 per cent from 1871 to 1881, and 3.4 per cent from 1881 to 1891” to contrast it currently sits at 1.8 per cent (Lowe 2016)
- The view emerged that you couldn’t lose money on property (sound familiar)
- Credit far out-stretched deposits and “bank advances as a share of deposits rose over the 1880’s”
- From 1892 to 1898 bank trading banks deposits fell 20 per cent
- “Historically one of the major causes of financial instability has been rapid increases in bank lending in conjunction with unsustainable rises in asset prices”
Gathered from an Australian financial review article January 6, 2016 by Stewart Oldfield – Why the great Australian property crash of 1891 could happen again:
- City blocks in Melbourne increase 100 per cent in 1887, Increases of up to 80 per cent in Sydney from 1880-84
- The housing crash came in 1891 when prices fell by about 50 per cent “In the suburb of Prahran, prices peaked at an average of more than 1000 pounds in 1888 and fell to 520 pounds by 1898.”
What we see from this is that although the economy seemed to be doing well and people believed that they could not lose on property it did go down and they did lose on property. The question then becomes could it happen again?
Going back to the Two depressions, one banking collapse research paper, there was one sentence that particularly stood out to me it was “Historically one of the major causes of financial instability has been rapid increases in bank lending in conjunction with unsustainable rises in asset prices.” (Fisher & Kent 1999) This I will relate to the housing bubble. First, I just want to make clear how so much new money is created when a bank loan is taken out.
Most people think that when they get a loan from a bank the bank is only lending them from the deposits of other customers who they pay interest to at a smaller rate than they collect from you and the difference is how they make their profit (Varoufakis 2017). In actual fact banks can legally create money to loan a customer “at the stroke of a pen or a few buttons on a keyboard” (Varoufakis 2017) it is “the bankers’ magical power” (Varoufakis 2017). It is magic money as I call it because it is created from nothing and made real when you pay it back with your real cash/wages. Still why be reckless? Well lenders certainly don’t start out that way however the incentive to lend more is increased when “the bankers found ways to insulate themselves from the fallout” (Varoufakis 2017), they sell off piece by piece parts of your loan to other investors and recoup the original amount loaned straight away minimising their exposure. The investors and the bank then share in the interest that you pay on your loan. If you are not able to pay the loan it is the investor that has lost not the bank. Even the magic money must still be collected from the debtor to secure this exposure because if it wasn’t the investor would have no incentive to invest in the first place.
The loans become riskier and riskier the more credit that is pumped into the system as the economy struggles to keep up with the huge profits (money generated) made resulting in the debt not being able to be repaid. If you watched the movie the Big Short then you will understand how it was a few investors that realised that the banks had got to this risky end of the credit cycle and sold off their stock causing the rush that collapsed the US housing market (although it would of come regardless they just saw an opportunity to make rather than lose money).
Back to the statement about unsustainable rises in asset prices. I will be paying particular attention to the words unsustainable and asset prices to unravel what this means for the current housing market. First the asset is the house and land (better known as your beloved home) and what is meant by unsustainable in these terms is a price that will not yield a return therefore the price cannot be sustained. So how would housing loans on mass not yield a return when we all need shelter? The answer to that is when the debt is too high to be repaid.
Going back to the collapse of the feudal system and we find that debt comes before surplus (Varoufakis 2017). Most people need a loan to buy a house, so credit is given debt is created and more money is injected into the system. This happens over and over again many millions of times, prices go up due to inflation the loans become bigger and bigger and by nature riskier and riskier because what is also going up is debt. An example of what could constitute a risky loan is; you own your own house outright and thought housing looked like a good investment to boost your retirement income. Based on this you buy an investment property, the bank lends you the credit to do this not as a result of a deposit or your income but on the fact that they use your house as security for the loan. Now even if you are retired comfortably you have become subject to the fluctuations within the labour market because your ability to pay the loan is based on someone else’s (the renters) ability to secure stable full time work. This by nature is a risk because it is calculated using missing numbers based on speculation not on your ability to pay back the loan but on someone else’s that you don’t even know.
Coinciding with the Australia housing cycle many other economic processes have been going in the opposite direction, creating opposing forces. A very notable one is that wages have stagnated and even in some industries actually started going down. Retail and Hospitality workers make up the largest industry share of workers at 17.3 percent (Vandenbroek. March 23, 2018. APH.www.aph.gov.au) of the paid workforce and they have now suffered government policy that reduces their wage.
Now you might not work in this sector and think well so what I don’t work in that area that’s not my problem it won’t affect me. However it actually does, we’re all in this together and here’s how; Let’s say for example you own a home, are university educated, earn a good wage and have a mortgage you can service easily. How does someone else’s pay cut effect you? Well a huge amount of people remember 17.3% of the workforce who had already suffered 15 years of wage stagnation that priced them out of the house buying market years ago and left them in the rental market (see still in the market still able to have an impact). Now their wage cut is going to put tremendous strain on their ability to pay their rent. Maybe you are thinking yeah but I don’t own an investment property how does this affect me if they don’t pay their rent?
This is how it unfolds. House prices have been going up and up rents have been going up and up to meet these new loan obligations. While wages for 17.3% of the working population have been going down. That working population will struggle to make ends meet including paying rent even as house prices have ‘slowed’ their wage has not kept up with the rate of house inflation for over a decade. Now they begin to go backwards. When such a huge mass of people are struggling to pay their rent then the amount that was loaned to the landlord for the rental investment becomes very risky. Risky loans herald exits, or defaults and history tells us that ‘unsustainable’ prices occur when the asset price has gone too high. What I would say is a measure of too high in terms of an asset price is when a substantial number of people are priced out of the market. In Australia this firstly occurred in the house buying market and is now transferring down to the rental market. When they start to sell or default then this trouble comes knocking at your door too as your house price also drops in value along with the rest. All of a sudden, all that comfortable equity can be swallowed up by the price drop.
In fact banks are already starting to prepare for this as Nicole Pedersen-McKinnon reveals in her article on the 19th of August 2018 in the SMH “If you have extra money in your mortgage, get it out now” and “meanwhile, the rumoured bank “sweep” apparently starts in October, suspiciously after the banking royal commission will finish hearings.”
The wage deductions are just one example of recent income loss that is working as an opposing force to house inflation. There are many more such as governments cut-backs on welfare payments, these too flow onto the rest of the economy and not in the ‘great we saved the tax payer some money’ argument that is often toted out.
Although this is the mantra that has been successfully used to further denigrate those unfortunate enough to be unemployed, making it easier for the public to see them as less deserving, less human and then accept the cuts to their payments. This too though has a ripple effect (although perhaps we could call it the spurting up effect of economics) to the employed house owner with a well-paying job. Bringing it back to we are all in the market together it isn’t an opt-out situation anymore; it is the society that we live in.
Here is how these cuts effect you too and it has to do with recycling “just like any ecosystem, a modern economy cannot survive without recycling” (Varoufakis 2017), basically what is meant by this is that for large number of business’ requiring employees for production they must pay wages and then these wages are recycled back into the system by way of purchases.
When you restrain this process through wage cuts and welfare cuts you are restraining the very system that supports you. Keep in mind the poor are the best recyclers of all as they must spend all their earnings to survive there is very little room for savings. Making it harder and harder for ‘little fish’ to survive impacts on the ability for this ecosystem to feed the ‘big fish’ as the little fish will eventually not even be able to afford the essentials such as we are gradually beginning to see in the way of what is referred to as a ‘housing affordability crisis’ (clever wording disguising in plain sight a far bigger problem in our recycling system).
This happens slowly and people tend not notice at first. Even though it is there to see as homeless rates are rising around the country 14% nationally and rough sleeping 20% (Baker. “Sydney’s tent city: One year on, where are they now?”. August 17. www.sbs.com.au).
I know the argument for wage cuts usually goes something like this; cuts to wages (or sometimes taxes) will enable the business to invest more in the community in way of jobs.
So, let me address that as it is only partially correct and again this is just distracting from the bigger picture. “The trickle-down theory of economics” (Atwood 2008, 102) has us believe that money given to the rich will flow down the economic chain “notice that the metaphor is not that of a gushing waterfall but of a leaking tap: even the most optimistic endorsers of this concept do not picture very much flow, as their language reveals” (Atwood 2008, 103).
Looking again more closely at the hospitality and retail cuts that are under way to better understand this theory of trickle -down economics. The business owner will say they can now create more jobs, true however it is the type of jobs created that is important in this scenario. It has been long thought that business needs flexibility in the work force so that during slower periods they can reduce hours and save on costs. While this seems like a reasonable theory it just isn’t that simple, it is a theory too isolated from the rest of the ecosystem. Still it is widely used in the Hospitality and Retail sectors. Our system is based on recycling and must have the means to continue this. Henry Ford was one of the first to recognize this when he realised he must pay his employees enough so that they could afford to purchase his cars (few it appears recognise this now).
In hospitality two things have emerged as wages have stagnated and then fallen, firstly more jobs were created but they were in the form of casual jobs (to protect the business in a downturn it is thought). This produced a huge workforce of unstable employment and priced these workers out of the housing market. The second blow comes when the wage cuts hit those that already had full time work or at least the offer of it yet could not afford to take it up because the full-time rate is too low to survive on. In this case more and more will opt for casual status in exchange for the higher hourly rate. This is full of pitfalls as its based mostly on hope that full time hours will still be retained. This doesn’t eventuate due to the trickle-down effect so during a slow period (which always happens) hours are cut resulting in more of the workforce now being in unstable (or unviable) employment.
My understanding of this comes from the ideas formed around ownership; if one believes the surplus produced is wholly their earnings then the employee becomes a bit of a dead weight dragging down the profit in the form of wages. So, when times are slow wages are cut. Putting aside of course that the employee helped produce the product that produced the surplus, in the context of ownership they are just viewed as an expense and this legitimises the trickle-down economics model.
As the surplus is owned and then controlled by the top then it is not used during the downturn to keep the machine going. Keeping the employee in stable employment would allow the recycling system to continue more in balance and then in turn would create more surpluses ending the temporary downturn. Its far too tempting however to hold onto most of the profit at the level of ownership as our society has moved to value money so highly and then we give those with the most money a high-status ranking and who doesn’t want to rank highly within society?
Those that do this are only conforming to a system that says money is highly valued therefore leading to an assumption that if you have more money you will be more valued. This is so ingrained in us that it does not seem to matter where you sit in this scale, we admire those with more money and blame those with less thinking them to be less.
NOTE: although this understanding was gained from reading books such as Yanis Varoufakis – Talking to my daughter about the economy and Margaret Atwood’s Payback: Debt and the shadow side of wealth, it was also accumulated over time from other books such as Noam Chomsky’s Power Systems and How the world works and various other sources. It is still thought through using the lens of my own perspective, of what I think their message is and this forms my interpretation. Meaning that my personal experience and bias’ can also influence interpretation. This is why it becomes my interpretation even though it uses as its base other people’s knowledge.
What we start to see is wages aren’t going up any time soon due to the social conventions that put a downward pressure on them. Add to the main purpose of the business like the banks is to make a profit. To increase this profit (continuous growth) the banks must lend out more and more and the business must eventually look to cut costs making wages lower and lower. We see this happen all the time when companies move operations overseas to take advantage of cheaper labour once they have exploited all they can in the local market.
You would argue that Hospitality and retail couldn’t move operations overseas so how do they manage this cost cutting measure? They have needed government intervention to allow them to cut costs through legalised wage reduction as we have seen recently carried out by the so called fair work commission.
Even though the hospitality industry has experienced a boom as Australians have embraced the cafe culture (just think about the trend of eating out and how the café culture has developed over the last 30-40 years, this is a very new thing) the motive for greater profits has been too seductive. And these bigger potentials for profits have not transferred nor trickled down to the employees. Resulting in wages going down and this transfers to the wider economy including the housing market. As currency is reduced through wage reductions so is the ability to pay back the huge loans of credit that have fuelled the housing boom.
Okay so I know what you might be thinking is this going to end in some socialist speech, I assure you it isn’t. I am just trying to explain how the housing market correlates to the wider construct of the ecosystem that it inhabits.
I will now defer to Margaret Atwood to shine some light on how this scenario plays through history. She tells us “if there are no more little fish, the population of big fish collapses” (Atwood 2008, 138) even though she is referring to the collapse of empires such as the Roman “grind the peasants too much and they cease to yield”(Atwood 2008, 138) . The same can be related here to housing and a mass proportion of the population that have experienced an uncoupling of house inflation to income, causing an extreme imbalance. Perhaps this is part of what is meant when Noam Chomsky refers to wage slavery in relation to the average wage earner. As they have become the modern-day form of the peasants of the fallen Roman Empire when the wages barely sustain the basic cost of living.
Still even in light of all that is happening in the economy there will be those that believe growth can be indefinite within our system. Now I will attempt to address that scenario too. It comes back to the analogy that Margaret gives us with the ‘big fish, little fish’ ecosystem.
Let us say house prices continue to go up and up and we reach a time when they are on average two million dollars. All the little fish are out of the market forever and the big fish remain alone. Those that are in the market think they are safe, they pay their mortgage and eventually own the home outright. But wages stayed low for basically the same reasons house prices went up, the belief in infinite growth. In the pursuit of it though for example if average rents went from $500 to $1000 and even that wasn’t enough to cover the cost for the investor then rental investments no longer become viable. In this scenario no renters are left as they cannot afford the rents, no investors are left, only home owners who don’t need any more credit for housing as its far too expensive now to service a loan for even a holiday home as they have lost their investment income.
Of course, I need not go any further with this example as it becomes obvious to see that this would never happen because banks need customers to borrow to be viable and customers need banks to loan to them to create surplus. When we get rid of the little fish the whole system collapses. Or in this case there could be a housing crash and the system would reset.
Still a sceptic? Just look at the ratio of debt to income or in other words income available to pay the debt. In the 1990’s it was “28 per cent of household disposable income, according to Reserve Bank figures… as of September 2016, it was 98.4 per cent” (Fitsimmons “Today’s housing crisis is worse than the 17pc home loans of the 1980s” SMH, February 24, 2017). As of January 2018, this debt was sitting at a whopping 200% “one that is the highest in the world” (Chalmers “Household debt ‘extremely elevated’ after hitting near 200pc and tipped to grow” ABC, January 18, 2018). The good life it appears has been borrowed from a line of credit and now the bills are rolling in without the income to pay them.
Yet despite these startling figures you will commonly hear that housing is only going to incur a slight down-turn no need to panic folks it will settle soon seems to be the message. Why all this positivity in light of some not very positive figures? It has to do with something called faith, yes faith and it has a long history when it comes to money. Just read Margaret Atwood’s book on debt to see the correlation between the emergence of the economy and faith believing (strongly held belief without proof).
In Yanis’ Varoufakis book he too touches on faith and its purpose. Don’t get me wrong here I am not trying to say that having faith is a bad thing it can be useful as long as it doesn’t go against the nature of say science or the nature of which a system works. If I had blind faith that climate change wasn’t happening, then this would be counter-productive in solving the problem because it would prevent me from acting. However, if I had faith in humanity that we could all work together to fix it then this faith would drive me to act and we could have a chance at preventing it. Varoufakis uses the allegory of a stag hunt where there are a group of hunters out to hunt a stag, which would feed their families for many days, but it will be difficult and they are not guaranteed success. On the other hand, they could just hunt rabbits that are easier to catch as there are many more opportunities to do so but this will only provide one meal. Now if they all work together, they have a greater chance at getting the stag, however if one of them doubts this and leaves the group to hunt rabbits instead then their chances go down. This doubt can influence others and one follows the next until the chances of catching the stag dwindle to such an extent that lack of faith becomes a self-fulfilling prophesy.
This relates to the house market positive spin in that the faith that it will go up can encourage people to stay in it preventing a mass exit that would cause it to collapse. However, in this situation it could be that the faith is blinding the ability to recognise the other forces in the system, in particular the setting of boom and bust cycles. I think most people would agree that Australia has recently seen a housing boom starting out from approximately 1996. If one is then to recognise the boom and acknowledge we have a boom and bust cycle then a reasonable conclusion would be we are due for a bust and a large one given its been the biggest housing boom in our recorded history. I have never heard of a boom and slight slow-down cycle, have you?
This also relates back to the wage stagnation and reductions as those that struggle to pay for essentials cut back and this is then observed and felt by business owners then they too start to lose faith resulting in more job cuts backs. It’s all a vicious cycle of boom and bust.
Why this system you may ask and again I refer to Atwood for the answer “those that won the wars wrote the laws, and the laws they wrote enshrined inequality by justifying hierarchical social formations with themselves at the top.” (Atwood 2008, 21)
In any case we have these two forces – the banking sector and the employment sector – both equally important and influential in our market economy and they have lost their equilibrium and the only mechanisms we have available within this system so far are boom and bust. What happens when something becomes completely unbalanced? My theory, it crashes loudly.
If this was to happen within the housing market, then I think there is a lot of wisdom that could be applied in the handling of the fallout out when we look to understand what Atwood is trying to tell us through the story of Ebenezer Scrooge:
“he’s never given anything back. By being a creditor of such magnitude in the financial sense, he himself has become a debtor in the moral sense…money isn’t the only thing that must flow and circulate in order to have value: good turns and gifts must also flow and circulate…for any social system to remain in balance”(Atwood 2008, 171)
The economic system after all must function within the parameters of a social system to be able to obtain trust and have any authority to operate.
I realise it could seem reckless to even write this type of article given the need for faith in it to succeed. However, faith is only one component and the others are well under way, as I have illustrated. So, I actually think it would be more reckless not to look into the system that governs a huge part of our lives.
I would also remind readers of what I stated at the beginning of this article and that is I am not an economist I am a poet. Although I may speak with no ordained authority on this matter and this piece of writing is a working out sheet that I use for the poems that I write, it still is important to remember that the economy is not a mystical world it is the world market we live in and it is possible for all of us to understand how it operates.
My view is from the ground and from knowledge I gained through reading some books and news articles and there are those who would argue it misses the view they can see from the top. To which I would agree, but I would add that my view from the ground allows me to see the great defining details that is often missed due to the distance acquired from being at the top.
Anyway, that’s just my working out and I would expect there to be many mistakes within it. However, I do not fear the embarrassment that could be caused by making these mistakes as I have learned through the making of mistakes that I still gain invaluable knowledge. I think it more foolish to not try and gain understanding for fear of embarrassment when failure and knowledge so often go hand in hand.
The real market
I woke up crying
as the machine pulled
out the life next door
unsatisfied were the owners
of number seven’s beach shack
that sat unobtrusively
They took the trees
with such ease,
these natives gave
so much shelter
Now are exchanged
for a double block
of buildings that
will emit spoil
The soil is already
in protest as it
is picked up by
a howling wind
that has come
to take it away
This slope is slippery
as it falls away
to keep it grounded
the community falls away
Renting the dream
The roof caved in last night
Even though I had paid
Paid for your service
Paid for your dream
I barely know your name
The one I paid the way for
Your decision is my disruption
And still I pay
It will take time
It will take patience
It will serve up the returns
It will become derelict
I imagine this day
Will not be for me
It will be your returns
For a loss of propriety
I imagine the day
My day to trample
Bought at your loss
Celebrated as savvy
I just wish
We could imagine better
Better to provide security
Better to divide prosperity
Bubbles are built to burst
This comes as no surprise
Can’t change the nature
Can change the device
A grounding sensation
Growing from a place to call home
The dream we all have
Even when uprooted
They remain attached as memories
Melancholy plays their tune
Sweet and sometimes bitter
Aching to find fertile ground
A place to hang a hat,
A home of ones own
They wander weary from purpose
I have known this journey
Packed the bags, paid the toll
Searched the hills, followed the streams
To find a place, a home
Still the roof is rented
Denying the roots stable ground
Soon all that will be left is rot
Money bought up my hometown
Money displaced communities ground
On holidays in fantasy land
They bought a house
Not a home
It stands alone
Empty of the soul
As no roots laid the ground
One can only have one home
And home they always go
Leaving a community uprooted