Australian Lefty on Politics, Governance, Science and Info Management

Housing crisis – ABS points to a contributor

Posted by Dave Bath on 2007-11-29

Given comments by economists in newspapers that housing unaffordability is made worse by speculation and negative hearing, it’s worth looking at the Household wealth and wealth distribution, Australia, 2005-06 report from the ABS.

Nearly 1 in 5 (20%) of all households owned property other than their own home, including holiday homes and rental property.

That points to a lot of speculators in the market.  Decreasing the incentive for speculation, by cutting out negative gearing, would increase affordability.

However, increased affordability actually means "lower prices", so any politician that succeeds in correcting the bubble created by Howard’s policies will really annoy a lot of people.

If (as The Economist suggested a year ago) Australian house prices are between 55% and 75% overvalued (they used P/E ratio analysis like you would for investing in a company), then let’s run some rough sums without a calculator.

Average value of home that is owned: $417K.  Average outstanding mortgage: $142K.  Value after 55% correction (dividing by 1.55 to be ultra conservative rather than multiplying by .55): $269K.

This means that the average home owner has already spent $275K (plus interest) for an asset worth at most $270K, and still has $142K (plus interest) to pay off!

It’ll take a brave politician…. but negative gearing must go ASAP.


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