High-priced homes do not create wealth, Alan Kohler says, they redistribute it. Now financial success is largely a function of geography, not accomplishment
My parents were married in 1951 and, with a war service loan, bought a block of land in South Oakleigh, eight miles from Melbourne’s central business district.
I don’t know what my dad was making then, but he was a carpenter and apparently, the average wage of a carpenter in 1951 was about 80 shillings a week, or £350 a year. And judging by average prices back then, they would have paid about £1,000 for the land. (By the way, the median house price had more than doubled in 1950, recovering from the big fall caused by price controls during the Second World War, on which more later.)
Dad built the house himself, including making the bricks, working on weekends and at night, and Mum and Dad lived in a garage, to which I was brought home when I was born and where I spent the first three years of my life. But if they had bought a house and land package, which was rather more common than building it yourself, they would have paid about £1,250. So, like the median family at the time, they would have paid about 3.5 times their household income (Mum didn’t work) for their first house, which was about average for the time.
When my wife and I bought our first house, in 1980, we paid roughly the median house price of $40,000, and I was making around the average weekly earnings as a young journalist – $220 a week, or $11,500 a year. So we also paid about 3.5 times my salary for the house, although we were better off than my parents because my wife was working, for about the same salary as mine, and my mum didn’t, which was normal for both times. Workforce participation for 30-year-old women had increased from 32% to 50% by 1980, as a result of the social/sexual revolution of the 1960s and 70s.
Over the past four years, our three children and their partners all bought their own first houses. They’re doing it later than we did, and much later than my parents, so they’re making better money, and both partners are working, of course, but they paid about 7.5 times each income for their houses. That is typical: in August 2023 the median Australian house price was $732,886, which was 7.4 times annualised average weekly earnings.
For someone with little or no family housing equity behind them, it’s virtually impossible to break out of the cycle
In other words, my children – and all young people today – are paying more than twice the multiple of their income for a house than their parents – and their grandparents – did, and it’s only vaguely possible because both partners work to pay it off.
The problem started with the new millennium.
It is impossible to overstate the significance to Australian society of what happened then. The shift that began in about 2000 in the relationship between the cost of housing and both average incomes and the rest of the economy has altered everything about the way Australia operates and Australians live.
Six percent compound annual growth in the value of houses over the past 23 years versus 3% annual growth in average incomes has meant that household debt has had to increase from half to twice average disposable income, and from 40% of GDP to 120%. This is the most important single fact about the Australian economy. The large amount of housing debt Australians carry means that interest rates have a much greater impact on their lives, and this in turn affects inflation, wages, employment, and economic growth. In the Australian economy, the price of houses is not everything but it’s almost everything, as the economist Paul Krugman once said of productivity.
Land and energy are the two basic economic inputs apart from labour, but while Australia has more of both than just about any other country, we export most of the energy and price our own at global parity, so there’s no homegrown advantage there, and we crowd into a few cities and pay each other seven to eight times our salaries for land.
High-priced houses do not create wealth; they redistribute it. And it’s meaningless because we can’t use the wealth to buy anything else – a yacht or a fast car. We can only buy other expensive houses: sell your house and you have to buy another one, cheaper if you’re downsizing, more expensive if you’re still growing a family. At the end of your life, your children get to use your housing wealth for their own housing, except that we’re all living so much longer these days that it’s usually too late to be useful. Much of this housing wealth is concentrated in Sydney, where the median house value is $1.1m, double that of Perth and regional Australia.
It’s destructive because of the inequality that results: with so much wealth concentrated in the home, it stays with those who already own a house and within their families. For someone with little or no family housing equity behind them, it’s virtually impossible to break out of the cycle and build new wealth.
It will be impossible to return the price of housing to something less destructive – preferably to what it was when my parents and I bought our first houses – without purging the idea that housing is a means to create wealth as opposed to simply a place to live.
That’s easier said than done, as China’s president, Xi Jinping, has found. He has been banging on about this for five years, saying that housing is not for speculation but for living in, but no one seems to be listening in China, and no one would be listening here either if the prime minister was saying the same thing. But anyway, he’s not.
The growth in the value of Australian land has fundamentally changed society in two ways. First, generations of young Australians are being held back financially by the cost of shelter, especially if they live somewhere near a CBD and especially in Sydney or Melbourne; and second, the way wealth is generated has changed. Education and hard work are no longer the main determinants of how wealthy you are; now it comes down to where you live and what sort of house you inherit from your parents.
It means Australia is less of an egalitarian meritocracy. Material success is now largely a function of geography, not accomplishment. Moreover, the geographic wealth gap is being widened by climate change, as floods and bushfires make living in large parts of the country uninsurable and financially crippling, but many families have no choice except to stay where they are because those areas are low-priced and they can’t afford to move.
The houses we live in, the places we call home and bring up our families in, have been turned into speculative investment assets by the 50 years of government policy failure, financialisation, and greed that resulted in 25 years of exploding house prices. The doubling of prices as a proportion of both average income and GDP per capita has turned a house from somewhere to live while you get on with the rest of your life into the main thing and for many people a terrible burden.
This is an edited extract of Alan Kohler’s Quarterly Essay, The Great Divide: Australia’s Housing Mess and How to Fix It, published in The Guardian
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