There is a panic in the corporate media about the luxury property value crash in exclusive suburbs like Mosman, Point Piper and Toorak. The investor class, property developers and real estate agents are trying to turn the falling prices into a national economic crisis, while everyday Australians are finally finding room to breathe.
What we are seeing is the split between a house’s use-value and exchange-value. A home exists fundamentally to provide shelter for human beings — the use-value. For over thirty years, our tax system treated housing as a speculative asset class for the ultra-wealthy — the exchange value.
The most expensive residential property in Sydney and Melbourne are down more than 10 per cent, while affordable homes remain resilient — what this means is that 1) the wealth of most everyday people who own their own homes isn’t collapsing, and 2) when unproductive bank loans and vast tax subsidies from the public purse are stopped, luxury real-estate values collapse because they were never really that much.
The mainstream economists who get reported in The Australian and AFR are warning of a “reverse wealth effect”, claiming that if property speculators and ultra-rich luxury apartment owners feel poorer, the entire nation will face a recession. This exposes an Australian plutonomy where domestic consumption and economic growth is centred on inflating wealth (in the form of land values) for the ultra-rich.
Here’s what I wrote earlier this year:
The housing crisis is the direct result of decades of state policies and the power of the commercial banks that turned homes into speculative financial assets for the ultra-rich.
What this means is that the ultra-rich treat housing like shares on the stock market. Thousands of the ultra-wealthy buy up houses and land in order to benefit from rising property values. Last year, the wealth of 3000 billionaires jumped its highest ever, $18.3 trillion in combined wealth — a large part of that wealth is from owning property like housing.
Everyday people are competing with ultra-rich property owners looking to buy their fiftieth house and are using global wealth and tax breaks so they can pay prices no-one relying on a salary could ever match.
Tax breaks for property speculators, big bank profits and a refusal to build public housing created this mess, not everyday working people and not immigrants.
As housing prices go up, more people are forced to rent. This allows the ultra-wealthy to “extract” your wages every month to pay off their own loans, further increasing the gap between you and the Epstein Class.
The decrease in housing prices is not a general economic crisis. First-home buyers and owner-occupiers are stepping in to replace exiting speculative landlords. Everyday people are driven by the material necessity of having a roof over their heads, entering the market the moment speculative premiums recede.
For this reason, sharp declines in the paper value of houses doesn’t have an economy-wide effect because the people buying homes are purchasing them to live in them, not to use it to gamble on increasing prices or to park excess cash.
In 2021 house prices rose an average of 24 percent, an astronomical and irrational increase during the COVID pandemic that was driven by Reserve Bank and commercial banks’ stimulus money flooding asset markets.
You can see from the graph below that property prices rose 400 per cent since 2000 (when the CGT discount was introduced) and grew 2.5 times faster than real wages over the past decade. This has absolutely destroyed affordability, and forces people who want to buy a home to live in to take on massive, crippling mortgages that enable them to buy somewhere to live.
Housing concerns is at the top of the list when it comes to Australians anxieties (and it is the same across the entire developed world). Almost every suburb in every city is unaffordable — not because of population, because there are enough homes, but because of extreme asset inflation driven by commercial banks and billionaire wealth.
The fact that housing price increases was being boosted by tax subsidies is now clearly seen by the fact that the instant the federal budget restricted the CGT discount and limited negative gearing to new houses, mansion and luxury residential property asset valuations started to decrease. This proves that astronomical house prices were artificial, completely manufactured out of handouts from the public purse.
Turning housing into a speculative financial asset for the wealthy to gamble on and everyday people to tie their sense of financial security to was a disastrous mistake. We ended up inflating the cost of a limited, absolute human need, primarily enriching landowners, banks and finance executives at the expense of renters and mortgage holders who live in their home.
It has been a catastrophic, historic, social error to make housing a financial investment first, and a place to live in second. The financialised housing crisis works by commercial banks lending money for people to buy homes. This increases the value of the (scarce, fixed quantity) land, especially in areas with a lot of amenity, public transport, parks and schools, etc. As house prices rise, people have to borrow more and more to buy a home, and this further boosts the value of those homes, and so on. A vicious cycle. The vast majority of loans end up financing the purchase of existing houses rather than building new, affordable homes.
This process transforms housing from a social good (shelter) into a financial asset used for speculation and wealth accumulation. Banks and the asset-owning elites are forced to pump this cycle because of the fundamentals of neoliberalism — over the past 30 years, the real economy has been hollowed and weakened so much so that the profit rate in the real economy is much lower than financialised profits
Understanding the “para-economic” power of commercial banks generally and their role in the housing crisis is essential because it reveals that the financial system acts as a mechanism for upward redistribution. The profits created have no basis in the real economy, the new money created by the banks is not connected to any real production (like a factory, machinery or employment of workers). It is pure speculation and gambling.
It also explains why just “more supply” and “less planning regulations” won’t solve the housing crisis. Building more houses will just create more assets for the already wealthy to buy. Similarly, less planning regulations won’t address the conflicted incentives of developers to profit. The property development system isn’t building houses for people to live in, it’s building assets for the wealthy to own so they can park their surplus capital.
Asset inflation does not benefit everyone equally — this is literally an example of how the axiom “a rising tide lifts all boats” is propaganda. Asset inflation concentrates wealth among those who already own assets. As housing prices skyrocket due to bank-created credit, the wealthy see their net worth dramatically increase.
Private property developers are now threatening to halt construction because their profit margins are shrinking. This capital strike shows that we should not (and never should have) relied on the private, for-profit market to provide essential housing. We absolutely should reject the idea that private property development companies (owned by billionaires who want to suppress wages) can withhold essential goods to force governments to restore their tax privileges.
Relying on private developers to solve a housing crisis is an institutional public policy and political failure. Private capital builds multi-million-dollar waterfront mansions because luxury yields higher returns than modest, affordable homes. This is why there is a shortage of housing for people to live in, but more than enough mansions.
A 10 percent or even 20 percent decline in luxury house prices is an essential step toward economic sanity, not a general economic emergency.