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Good morning everyone,

You don't have to spend much time in Australia to realize that Australians are obsessed with property.

Down Under, it's normal for an Uber driver to ask you about your investment properties and for a BBQ conversation to revolve around the Reserve Bank's (RBA) latest interest rate decision. The daily newspapers are full of property stories, and house prices make the evening TV news.

Having grown up in Germany, where housing isn't seen as a speculative investment but as somewhere to live while you get on with the rest of your life, I find this national obsession obscene.

But for Aussies, property is the greatest of all investment assets, and it's hard to prove them wrong. After all, if you've owned property in Australia in the last 25 years, you've probably doubled your wealth several times over.

However, it's hard for Aussies to argue that the dizzying rise in house prices over that period was the result of free and undistorted market forces.

On the contrary, as Alan Kohler argues, it's the result of a "quiet political conspiracy". Kohler is an Australian financial journalist and author of "The Great Divide: Australia's Housing Mess and How To Fix It". (By the way, Kohler's son Chris posts hilarious financial content on Instagram. Check it out!)

I got the book for my birthday (Thanks, Tobi!) and wanted to review it for today's newsletter because I believe housing is the most important political issue in Australia.

DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.

Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Don’t forget to do your own research.

1. So what's wrong with housing?

The problem with house prices is not so much that they're too high. High prices alone are meaningless.

To assess housing affordability, you need to look at median house prices relative to median incomes. That's called the house price-to-income ratio.

While our parents and grandparents paid 3-4 times their income for a house (assuming a 20% deposit), young Australians are currently paying 7-8 times their income for a house. The house price-to-income ratio has doubled in a generation. House prices have grown much faster than incomes and the economy as a whole.

This has made Australia's capital cities some of the least affordable in the world. For a lot of young people, homeownership is simply out of reach. According to the non-profit organization Demographia, Sydney is the second least affordable city in the English-speaking world after Hong Kong.

2. What are (some of) the consequences of the housing affordability crisis?

• Young Australians are being held back financially. They can't access the housing market, which can have an impact on life decisions such as settling down and starting a family.

• The way wealth is created has changed. Education and hard work are no longer the main determinants of wealth. Now it's about what kind of house you inherit. This has made Australia less of an egalitarian meritocracy and has created a hereditary property aristocracy. Over the next 20 years, AU$3.5 trillion of wealth will be transferred from one generation to the next. Much of this wealth will be passed on in the form of property.

• Dividing society into property haves and have-nots has dangerous implications for social cohesion and political consensus.

• The view that debt-financed property investment is the greatest of all investments has led to high levels of household debt. Compared to other OECD countries, Australia's household debt ratio is the third highest in the world. In 2022, average household debt was 211% of net disposable income.

• The high level of household debt (combined with the fact that in Australia you can only lock in your mortgage for 5 years, not 30 as in Germany and the US) puts a brake on how decisively the RBA can raise interest rates to fight inflation. If the RBA raises rates too high too fast, countless Australians will fall off a mortgage cliff and default. That's one reason why Australia is a laggard in the global fight against inflation.

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3. How did we get here?

Let's divide this chapter into three sections:

1. Historical experiences that have shaped attitudes to land ownership

2. Urban planning and infrastructure

3. Tax changes and immigration after 2000

1. As Kohler explains, Australia has experienced two land rushes. The first after European settlement began in 1788 (based on the legal fiction that Australia was terra nullius or land that belonged to no one). The second after the gold rush in Victoria and New South Wales around 1850. These two experiences created attitudes to land ownership that shaped the development of housing in the 20th century.

2. Australian cities have only one center (called the central business district or CBD) and suburbs are spread out around this center, with the closest suburbs offering the highest standard of living and the furthest suburbs offering the lowest. (Beachside suburbs are a different story, of course.) This, combined with the fact that Australians like to live in detached houses with gardens and that there aren't many intra-city trains linking the suburbs to the city, pushes up house prices in suburbs that are close to the center. By contrast, European cities tend to have several centers, many medium-density housing suburbs, and public transport systems that make it easy to commute between the suburbs and the centers.

3. Around 2000, a number of changes to the tax system came into effect that created an explosive cocktail for property investing. Capital gains tax (CGT) breaks on property were introduced in 1999. These tax breaks, combined with negative gearing, which had been reintroduced in 1987, and the absence of inheritance tax, created a whole new incentive to invest. Investors began to put money into investment properties not because they wanted rental income, but because they wanted a tax deduction and a capital gain. This change came about at the same time as Australia saw a sharp increase in immigration. Between 2003 and 2009, net migration tripled but wasn't matched by an increase in housing supply. As Kohler writes: "The halving of CGT was the kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment from a niche activity into the leaping flame of everybody’s tax avoidance scheme."

4. Can it be fixed?

Kohler is not delusional. He knows that Australia's housing mess is hard to fix because it is a "cartel of the majority". He writes: "Everyone involved in the game - homeowners, state and federal politicians, banks, property developers - wants house prices to rise for their own reasons."

It's precisely these entrenched interests that prevent a political census from taking shape.

But Kohler argues that it can be done. What's needed is real political leadership, willing to do the right thing even if it's unpopular. The goal, he says, must be to reduce the multiple of income required to own a home to where it was at the beginning of the millennium. But with incomes growing at 4% a year, house prices would have to stay flat for 18 years for incomes to catch up. In my humble opinion, that's a long shot.

In the meantime, he argues that every tool in the shed needs to be used on the supply side of the equation as well as the demand side. His key policy proposals include cutting the CGT rebate to 25% and restricting negative gearing to newly built homes, linking immigration to the capacity of the Australian construction industry, using incentives and penalties for state and local governments to get better zoning and planning outcomes, and investing in intra-city trains to open up dormitory suburbs.

This is all very sensible and could work in theory.

But Anthony Albanese, Australia's current Prime Minister, just bought an AU$4.3 million clifftop house on the Central Coast. Peter Dutton, Albanese's rival in next year's federal election, has sold a mix of luxury and investment properties totaling about AU$12 million since 2020 and still owns several properties.

Draw your own conclusions, but I just don’t see how these guys are going to turn this mess around.

5. Final thoughts

Alan Kohler's book is the best account of the Australian housing mess I've come across.

Since almost everyone in Australia has a vested interest in rising house prices, it takes courage to go against the grain and call this mess out.

But while he acknowledges that the housing affordability crisis is global and looks at some of the other countries affected, his perspective is very Australian.

What he doesn't look at is our monetary system and how it affects our investment decisions. As a bitcoiner, it's the philosophy and politics of money that I'm interested in. So I'd like to add this to Kohler's analysis:

The money we use is tied to nothing but hot air, and it's easy for governments to create more of it.

As Lyn Alden writes in "Broken Money":

Put simply, when money doesn't hold its value, people are willing to pay inflated prices for assets that are likely to hold their value, such as property.

Have a great weekend, everyone!

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