Monday, December 18, 2023

Op-Ed: The Great Rental and Mortgage Gouge 101 — Where economics, numbers, and money don’t mix well.

By Paul Wallis
Published December 15, 2023

Even New Yorkers lucky enough to live in rent-stabilized apartments -- approximately one million units and two million tenants, according to city data -- are not immune to the growing housing crisis in their city. — © AFP

Welcome to 2008 again. Interest rates are the easy excuse for gouging the world’s property markets. This disaster is getting plenty of negative headlines, but no positive actions are visible, and mortgagees and renters are just trying to survive.

The lessons here are simple:

Governments do not govern.

Markets are not regulated.

Suicidal economics is fun!

It’s not so much a market as a cartel, the classic anti-trust scenario. Everybody put their prices up to unaffordable levels at the same time and there’s no comeback for consumers. Result, “chaos as usual”, at the public’s expense, as usual.

In America, the scenario is an unrelieved catastrophe. The rest of the world isn’t doing much better. It’s anyone’s guess how much money has been ripped out of the global economy in this one sector.

For the purpose of narrative, I’ll use the Australian market as an example, because that’s the one I know best historically.

The Great Australian Rental and Mortgage Gouge started in 2022 with the interest rate rises. Interest rates do play a role in the property market, usually on margins. The rapid rate rises caused adjustments, as you’d expect.

However – That’s also where things stop making any dollar sense at all.

Property markets all have one thing in common – Incessant euphoria about their prices. Nobody cares about affordability. It’s all about “great numbers”. Nobody was complaining about profitability well before the rate rises.

The property market was doing quite well, with post-pandemic and pre-interest rate rises. There were no real issues. The market was blasé at best. Everyone’s a zillionaire and a shrewd investor, according to the markets. Then the market decided everyone could afford massive hikes.

Suffice to say that’s not exactly the case.

The Australian property market has never been accused of being a charity. Rentals were however usually affordable. Now they’re usually unaffordable, and the rent vs income numbers are truly bizarre.

Mortgages are stretcher cases in many ways, over a huge demographic. Pre-pandemic, the mortgages were in a rather iffy state. 30% of mortgages were interest-only, an expensive form of rent with no equity gains.

The main reason for this was high property prices and a market infatuated with home ownership. That figure also meant that 70% of the market was more or less OK with the situation. Things have changed. Australia is now under more mortgage stress than any other nation, according to The Guardian.

The Australian economy is basically three sectors with about 30% of the economy in the high, middle, and low brackets. The financial economics would be laughable if they weren’t so destructive. The economic realities are unambiguous. According to news.com.au, the minimum income for renting a house in Perth will be circa $108,000 and $95,000 for a unit.

The problem with that is that median income in Australia is actually about $69,000 across the spectrum. If you want a fan-hitting exercise, try getting the same numbers out of all the different sources. That number is probably reliable and in keeping with historical trends.

Also note the inexcusable tendency to use numbers without demographic specifics. “John and Tom make $1,000,000 per year between them. Therefore, the median income is $500,000”, whereas John makes $40, 000 and Tom makes the rest of the million. This is obfuscation, not demographics.

This is also where the economics seem to deliberately miss the realities. It’s all about looking good, not reality in any known form. The Reserve Bank of Australia, the equivalent of the Federal Reserve, published a nice snapshot of the economy as it affects renters.

The rental market is “growing”, the number of owners is dropping significantly, and “median net wealth” for renters is appalling. None of this information addresses fixing the rental chaos in any form whatsoever.

Also, note how much property underpins “wealth” in this woeful tale. The “wealth” of housing has been backed up by soaring property prices for decades. Australian media sells real estate as much as it sells news.

Meanwhile – Population growth is now slowing. Demand for properties will ease over time. Everyone knows that.

Australia’s elegant solution has been to increase migration and foreign student intake and then blame migrants and students and bystanders for housing prices. It hasn’t worked. It hasn’t even begun to solve the problems.

What about rent controls, you may well ask. The quick answer is that rent control theory apparently has no constructive ideas. On the one hand, rent control “disincentivizes” property owners. On the other hand, the market has somehow decided rent control reduces the supply of houses.

The market is doing a great job of reducing supply all by itself. These mortgage and rental price rises have put the market at risk. Nobody can really maintain rents or mortgages which are so far beyond their means.

Every boom in a market causes a bust. The next one will be entirely self-inflicted

No comments:

Post a Comment