real estate
(posted on 2007-03-25 05:54:12)
Our system of housing ownership brings about a three-tiered system of economic classes, analogous to, if less dramatic than, the 19th century system of factory owners and workers.
Marx is unfashionable now but his analysis of society as social classes created by money flows still underpins a lot of our thinking. In Marx''s Europe the wealthy owned factories and farms, the poor worked in them, and the middle class performed the clerical, managerial, political and religious functions that kept the system ticking over. Owners paid workers the lowest wage that the market could bear, pocketed the difference between wages paid and goods produced, increasing their capital, while workers never accumulated enough capital to own anything.
We are now, erm, post-industrial, but you can still get a class system if one group owns, over several generations, the things that another group needs to live. Real estate is now the largest expense in many people's lives and I argue that it divides us into three classes: property investors, owner-occupiers and renters.
Property investors buy dwellings and rent them out. Renters work and give a part of their wages to their landlord, generally a quarter to a half of their after-tax income. Owner-occupiers own the home they live in, but no others, and are neutral in this system. To see how home ownership impacts financial situation, take three fictitious people, Larry, Owen and Reg. They start with the average Australian weekly income of about $800 after tax. Larry lives in his own home and owns another, which he rents to Reg for $300 per week. Owen owns one home and lives in it - he neither pays nor receives rent. After Reg pays his weekly rent to Larry, the money these three live on is: Larry $1100, Owen $800, Reg $500.
In other words, even if everyone starts with the same amount of money, the investor's actual post-rent income and standard of living is roughly twice as high as a renter's. Eventually some of these people will have children, and then an entire family will be living off that post-rent income. Raising children on $1100 vs $500 a week makes a big difference. The resources available to their children in turn will be quite unequal. Within a generation or two these families will live in different worlds, even if the circumstances they started out in - job, background, culture etc - were identical. Once a renter family is living on half the income of an investor family, the renters are unlikely to accumulate enough capital to ever own their own home, let alone an investment property they can rent to others.
ABS statistics show that while only 4% of the lowest-income 20% of Australian households own their own dwelling, 97% of the highest-income households own theirs. Cost of housing is the category of household expenditure that correlates most with income. The bottom quantile spend a quarter of their wages on rent and expensive mortgages, while the top spend only half that, because they either own their house outright or only require a cheap mortgage.
Do we want to start a new class system during this generation, and if not, what can be done to stop the process? Following the analogy with old-school Marxism, it seems that Australia can either (1) have a revolution :-), (2) legislate against private ownership of capital, or (3) leave it up to individuals to better their own lot. Option 1 doesn't seem so likely. Option 2 has been popular in the past - governments last century often nationalized factories, railways and other money-earning assets - but the Australian government encourages property investment via the negative gearing tax concession which gives a tax break to home-owners if they buy another dwelling and rent it out. Option 3 is flavour of the month.
But how does a renter pull themselves by their own bootstraps and achieve home ownership? The problem is easy to understand but hard to solve. Buying a dwelling requires an up front payment of about 10%. For a cheap one-bedroom flat a long way from town, this is around $20,000. But after losing a third of their income in rent, most renters will never save this amount. Many barely break even, or spend years of their money-earning life paying off debts. The few who crack that magic $20,000 and buy their flat must then hope to keep their job forever as they begin to pay off a 30-year home loan. At the end of this process - say, around age 55 - they now own their flat. That moves them into the class of owner-occupiers who don't have to pay rent. If they had another 30 years' employment in them, they might become landlords by buying a second home and renting it to someone else.
These amounts are now out of reach for most renters. In a way they're designed to be. That's the problem with the 'pull yourself up by your bootstraps' solution . In a competitive economy, it only works for a given person if few enough others achieve it. Most renters have about as much chance of joining the top tier of landlords as a 19th century factory worker had of becoming a factory owner.
There is a solution of sorts which many try. If two renters become a couple and live together, they can pool their two incomes toward buying one shared dwelling. But there is a trap. Most couples eventually want to have children. When there are kids to look after, one of the couple's two incomes either has to stop, or be severely dissipated by paying for child care, going part time, or both. For this reason, young couples are having children later (after they've saved some money) or avoiding it altogether. If the couple separates, their one or two incomes has to thenceforth pay for two dwellings, both of them big and expensive enough to conduct their alternating child-raising in. Unless the divorcing couple were wealthy or already owned a home, both are now doomed to rent.
To wrap up, my argument is that current real estate conditions are creating new economic classes which will become obvious over the next few decades. I'm not talking cliches like factory owners in top hats and workers in cloth caps - just regular people moving in opposite directions. These divisions will be self-perpetuating because only landlord families can afford to provision their children with homes and keep them out of the rental trap.
added 27th March: by coincidence ABC TV aired a show last night which addressed a lot of these issues. It was mostly good except for one dude who got too much air time promoting an increase in urban sprawl. I don't think any solution was agreed upon. Negative gearing - in my opinion the major cause of house price increases - was mentioned, but not in much detail. The interesting idea IMO is that we are creating a new class system 'as we speak'.
reply 2 from jim: Hmmm... (sorry greg; previous attempt at reply posting was a little unsatisfactory) What I find fascinating is that the whole renting phenomenon is premised on an anachronistic medieval social relation - we still call these arseholes "landlord" & "landlady". Contemporary renters are just like the peasants/tenant farmers who paid a rental to their noble leige - in the form of goods & military service - a fact which seems embodied in the maintenance of these ye olde titles (something we take for granted in our language so that noone bats an ear - but how does the material fact of owning a surplus dwelling in any way confer nobility?) Lets make the language transparent: how about "absentee pig"? Interesting history to the negative gearing debacle: Susan Ryan, most prominent member of the Socialist Left (remember them?) faction of the Hawke ALP government in the mid-80s, was pushing for federal legislation on rent control. I think a 1.5% per annum rise was the maximum they were proposing; anything more than that would have required landlords to demonstrate substantial improvements had been made to the rental property. But, investors & financial institutions flipped out, & lobbied hard for negative gearing. The idea was that the tax breaks that the federal government provided to property owners, would give property owners enough slack to keep rents down. The ALP caucaus folded, negative gearing was introduced. Institutions & individuals with lots of money generally agreed it was a good idea: by the time of the 1990 recession, the Australian dollar was the 6th most traded currency in the world (after the US$, UK Lb, Swiss Franc, Japanese Yen, and West German Mark). So the whole thing also promoted huge changes in the Australian financial system - in the space of a bare few years.
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