How the Housing Bubble is Remaking Australia’s Class Structure

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Yves here. Readers in the US, UK, Canada, and Ireland might compare and contrast their views on how the fact that housing costs generally continue to outpace wage rates is affecting class structure in your country. For instance, this article posits that the house-rich will be able to pass a lot of that wealth in the US along to their children. That would seem to be less often true here by virtue of many people having tapped into their home equity to pay other debts or defray living expenses, as well as some older homeowners having their home equity collected from their estate via Medicaid recovery.

Originally published in The Conversation

The relentless housing boom in Australia’s cities, especially Melbourne and Sydney, is often framed as an intergenerational conflict in which younger generations are being priced out of the market by baby boomers. However, sociological theories of social class suggest parents’ wealth and social status will eventually be passed onto their children anyway.

So, by focusing on intergenerational inequalities that will eventually be reversed, we are framing the housing affordability question the wrong way. At the same time, the impact of the housing boom is so deep that some long-established ideas about social class may be no longer relevant.

The housing boom has blurred existing boundaries between upper, middle and lower classes that applied to the baby boomers and previous generations. New social class boundaries and formations are being produced.

This does not mean younger generations, as a collective, are disadvantaged compared to their parents. Rather, these younger generations will be subdivided differently and more unequally.

The Renting Class

In the industrial city, the term “working class” was defined by the experiences of low-income workers in manufacturing jobs. Yet in a post-industrial Australian city it makes more sense to talk about the “renting class”.

Not all renters are poor, and not all poor households are private renters. However, the correlation between the two is significant and strengthening. The proportion of private renters in the total population is slowly but surely increasing – from 20.3% in 1981 to 23.4% in 2011.

Simultaneously, public housing – once a symbol of the working class – is undergoing a dramatic demise.

Largely abandoned by the state to fend for itself, with weak regulation for security of tenure or rent control, the renting class faces the unrelenting burden of ever-rising rents. The average renter paid 19% of their income on rent in 1981. In 2011, this proportion increased to 26.9%.

And, in 2014, around 40% of low-income private renters were in housing affordability stress, paying more than one-third of their income on housing.

With hardly enough “after-housing” disposable income to meet basic living standards, savings for retirement is almost impossible for the low-income renter. And with little or no wealth to assist their children to buy a home, the renter’s social class status is likely to be passed from one generation to the next.

The Home-Owner Class

More than just a status symbol, home ownership has become increasingly central to the way most Australians accumulate wealth. About half of the home-owner’s wealth is held in their own home. Each housing boom enriches them further through tax-free capital gain on their homes.

The housing boom also creates work in the construction industry, which is the third-largest employer in Australia with more than one million workers. These are no longer working-class occupations, with most skilled jobs paying average weekly earnings of close to A$1,500. So, it is arguably the home-owner class that benefits most from each construction boom.

One consequence of the housing boom is that a growing cohort of moderate-income households is now priced out of home ownership. Had they been born a generation earlier, they would have probably been able to afford a house. Now it is beyond their reach.

Over the years, as their rents rise and their wealth stagnates, the gap between the renter and a home owner will become unbridgeable. Their experience of retirement will be worlds apart.

One lifeline for this cohort is the prospect of inheriting some of the housing wealth of their baby boomer parents. But when this will happen is highly uncertain.

The Housing Elite

The housing elite is rewarded by the housing boom well beyond the capital gain on their own homes. Much of the massive wealth of Australia’s elite is generated through the housing market – through investment, construction and financing of housing.

Harry Triguboff, Australia’s third-richest person, earned his fortune in the apartment development business. So did the three youngest entrants into the 2016 BRW Rich List. Their entry marks the rising importance of housing in the making of Australia’s super-rich.

The top 20% of the wealthiest Australians hold most of their wealth in their home and in other investment properties. They also hold significant wealth in the sharemarket, which is commanded by big banks whose portfolios are heavily dominated by housing loans. Each housing boom significantly adds to their wealth.

Social class, however, is more than just financial wealth. The wealthiest Australians secure their social class position by living in exclusive suburbs where they are able to associate with the right people and live an elite lifestyle. The astronomical prices of houses in some of these suburbsensure their hermetically exclusive nature.

Breaking the Loop

None of these social class categories is natural or universal. These categories will not apply in some European countries, for example, that have very different housing systems.

The deepening fusion between Australia’s housing system and its social class system creates a dangerous cycle. The further house prices grow, the more important housing becomes as a determinant of social class. And when social class is increasingly defined by housing, people are willing to bid even higher to enter home ownership or the housing elite.

Unless we break this cycle, Australia will continue in its path of becoming a more polarised society, with a weakened renting class, an impenetrable elite, and a shrunken home-owner class between them.

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  1. Distrubed Voter

    In the US … the primary beneficiaries of housing inflation are “surviving spouses”. They benefit from property/life insurance rollover. That benefit stays in the same generation. About 1/3 of all housing is paid for … for the other 2/3rds … they inherit a mortgage liability, that might be under-water. If the surviving parent is long lived … all assets, including any property appreciation … goes to pay for medical and nursing care … the children don’t get it, but it does circulate back into the economy anyway.

    So how does the 2nd generation benefit from property inflation? Not much, unless they are lucky. You have to have a parent with a paid for property, who conveniently drops dead … and who arranged estate paperwork well.

  2. PlutoniumKun

    Reporting from Ireland here, this article certainly has a very strong ring of truth. The ownership of land and property has always been absolutely central to peoples ability here to maintain, or increase their social class and status, even more so than profession or raw income. It is a process aided of course by favourable tax policies and also the tossed dice of luck – i.e. when you managed to enter the housing system.

    To give one example of a family I knew growing up – the five kids were more or less contemporaries of mine. When I run into them now I’m struck by their ‘10%er’ sheen – they are usually tanned from recent holidays, nicely dressed, have nice new cars, their kids go to the best schools. But their jobs are very much ‘average or slightly above’ middle class. Two are teachers, one is a social worker, another a nurse. Their parents were teachers, back in the days when mortgages were allocated by a local bank manager and teachers were seen as a safe bet. Their parents were frugal and saved, and when each child was born, they would raise a mortgage to buy a large house in their neighbourhood, which they then rented out for 20 years or so. When each child left home, they were then given the house as a gift, and told to pay their own way by having lodgers, etc. They had a major stroke of luck in that the neighbourhood went from being an area of faded grandeur to a very popular and hip one, with property prices rising exponentially from the 1980’s onward.

    I can contrast them to other contemporaries I know who earn far more money – on much higher incomes. But many are nowhere near as ‘prosperous’, especially those who had the misfortune to find themselves only able to buy properties 10-15 years ago when prices were in a bubble. None that I know of are in dire straits, but many complain regularly about how hard it is to maintain the lifestyle they want, despite having very substantial incomes. And those who have ‘average’ middle class incomes who didn’t have the benefit of property behind them (and this includes those who came from what might be termed higher social classes), really struggle if they missed the property boat. Even within my own profession there is a huge difference in lifestyle and aspiration between those of an older generation who were able to buy property quite cheap, and those who hit the bubble at the wrong time. The latter are either shut out of the housing market, with all the financial advantages, or will be financially crippled for decades with an oversized mortgage. This of course will feed through to their own children.

  3. norm de plume

    My father was a tradesman and raised 5 boys in a house he paid off in about 25 years at low interest. My mother started earning late, after we’d all been through school. Over the time they were paying it off the average house price was 2 to 4 times the average annual wage. Here in Sydney at the moment the average wage is $77,000 and the average house price is something like $1.1 million. Do the math.

    As kids we had holidays every year, everything we needed for school, hobbies, sport etc, and money was still socked away by my dad in superannuation for retirement and/or the rainy day. Most of my father’s children, despite dual household incomes, do not own own their own homes and struggle to live in even the modest style to which we had become accustomed growing up. The only children who are doing well enough to own work in… commercial property.

    Although there is no question of any more successful family members feeling others had not worked hard enough to ‘make it’ – in fact there is quite a keen awareness of the plight of the class the rest of us inhabit, and a palpable ‘there but for the grace of God’ feeling of relief – still, you can’t help the apprehension of a personal culpability, a failure to ‘get ahead’, despite the obviously stacked odds.

    Rising property prices are only half the story of course – the other half is the stagnation of incomes. Well, incomes not tied to the FIRE sector. A third half might feature wholesale ownership class avoidance of tax responsibility, which in the olden days was difficult and perhaps also not the ‘done thing’ – in any case, it was comparatively rare. But even without the illegalities, the codes have been perverted to allow negative gearing and super concessions for the wealthy.

    The good times are rolling it seems if you listen to the news media, oblivious to the storm clouds many external observers have noticed. Doomsayers have predicted carnage in property here but the ship always sails on. The worry is that, as the article notes, our Big 4 banks are up to their eyeballs in RE debt and despite their reputation for probity (coming undone in recent years) still have to go cap in hand to the overnight money markets in order to do business every day.

    More broadly, every extra dollar in the economy that goes into property, servicing loans or borrowing for investment, is a dollar that is not available for anything actually productive. We have put so many of our eggs in one basket.

    So an Augean stable style clean-out may be a good thing sooner rather than later – but people like me need to go easy on the schadenfreude; if the shit-storm cometh we will, with our relative lack of insulation, feel the brunt first.

  4. Larry

    Real estate certainly is about luck. My boomer mother and her siblings had very little by way of value in their childhood home after my grandmother moved out. It is in rural Massachusetts and had a small mortgage on it still as a result of needed work to complete when she moved out. One of my uncles simply moved in and took it over. When my mother-in-law’s father passed away, I helped clean out her father’s home of over 50 years. It was in Pawtucket, RI, a former industrial city that is not on hard times, but is in no ways a desirable location. After cleaning out the house, my mother-in-law did work to restore the home and made a small profit after selling it. That profit was aided by a tax credit at the time that was reinflating the housing bubble here in the US. I know other people who have inherited modest homes in formerly modest locales that have now appreciated into the stratosphere and those gains are nothing but dumb luck.

  5. Moneta

    Here in Canada most of the well off retirees are those with guaranteed pensions. So when they pass away, the kids only get the house and probably not much from the pension… if it has not been used as an ATM.

    Some provinces are doing asset tests when handing out spots LTC spots. If budgets get tighter, we can expect more provinces to go this route.

    And a lot of the big 2500+ square foot houses built in the 80s are 80s museums… so I’m not sure how much these will be worth when they finally hit the markets.

    IMO, this real estate wealth is a short-term blip where there will be more greater fools than winners. And from what I have witnessed over the years it’s easy come easy go with money. It seems that that vast majority of those who do not “earn” their money have a hard time managing it.

  6. Skippy

    Sadly as good chunk of humanity lives in regions that will find increased drought, inundation and rising sea levels, as time marches on, the whole concept of owning a depreciating asset will have less than attractive attributes. This is further complicated by increasing job and income insecurity for a larger portion of the population.

    Disheveled Marsupial… the mitigation of such events might be a form of job creation and stimulus, when TPTB are good and ready, but that revolves around how the geopolitical tensions end up working out…

  7. Sandy

    It’s not an “Australian housing bubble,” it’s a Sydney, with parts of Melbourne, housing bubble. But in every major economy in the world, the richest, largest city (especially if a finance hub) has overpriced housing. Certainly New York and Los Angeles are more unsustainable (let’s cut out the dangerously unsafe areas prominent in these cities, as there is no Australian comparison to American ghettos) and they have property taxes, whereas in Australia you’ve only stamp duty at purchase. Factor in the lack of institutional residential rentals (no corporate apartment complexes where one landlord owns all units) too. All of my friends in Australia my age (millennial) own property, whereas none of my peers in the US do (all dealing with high rents, student loans, poor jobs, credit issues). I also think it’s unreasonable to compare to the USA, with its continental population distribution, epic housing crash <10 years ago, and inequality. Compare more reasonably to Switzerland, Sweden, Canada, et al.

    Jump on and search rentals in Melbourne, it's quite affordable compared to LA, especially when you consider one can earn $22/hr+ simply by working as a cashier or in a warehouse.

    If Sydneysiders are moaning about not being able to own a home, I encourage you to do as your American peers have always done, pack your car and drive off to a different, more affordable city. That is how the US was populated.

    Will there be a price collapse once a global shock seizes up the overseas money markets again? Yes. But I see no reason why those markets would not open back up again and we're back where we started.

    1. Yves Smith Post author

      First, I lived in Australia. Taxes are much higher there, plus you have superannuation. So while you have much higher wages, you also have higher taxes and mandatory charges.

      And this “institutional landlord” you are citing is an urban legend. Please describe one. In NYC, the closest you have would be Stuy Town, and that’s what, 5K units out of total NYC rentals of a bit under 2 million units . Most rental real estate is owned by either families or individual developer/owners (the Rudins, Fred Wilpon, the Fisher Brothers, Bruce Eichner, Steve Ross, and yes, the Trump family) or small landlords. My landlord’s big holding is a huge midtown building on Park right above Grand Central: my 65 unit building is one of seven residential buildings he owns and they are all rounding error compared to his office building.

      The building boom in Melbourne and Brisbane that has the RBA worried says that the rental markets are more strained than you suggest:–again-20160607-gpdlm1.html

      Even when I was in Oz, banks were willing to lend up to the level of 50% of income going to debt service and other regular property costs. Even US banks weren’t (officially) gearing that much even in the worst of the subprime bubble. How much banks are willing to lend drives prices. And landlords have been renting at negative gearing forever. That was prevalent if not pervasive when I lived in Sydney in 2002!

      As for the US, it is much more dispersed than Australia, where 85% of the country lives in 4 cities. So even though NYC and San Francisco rentals are brutal, the wages are correspondingly higher in both cities (although SF is particularly affordability-strained; you can rent cheaply in NYC and still have good access to Manhattan if you are willing to have a Queens address), there are plenty of cities with much cheaper housing.

      1. Skippy

        LOL Yves there is 13 years in the pipeline in Brisbane, mate works for one the biggest builders as a site manager. They have stopped taking tenders and the whole thing seems predicated on FIRE sector widgets moving towards the inner rings to escape suburbia along with the foreign education inflows…..

        Disheveled Marsupial…. “How much banks are willing to lend drives prices.” thank you – !!!! – so sick of supply and demand, land hording by counsels, regulatory overburden, et al being trotted out by free market stripes as the agency…. the crazy wing nuts are a developers BFFF’eva

      2. Paul

        Total taxes are not higher in Australia. There is one main federal tax on income in Australia which is higher that federal income tax rates in the US. However, there are no state income taxes, no social security taxes, no property taxes in Australia. You combine all these taxes (which one should for taxation comparison) and you will find the US is one of the highest taxed countries in the developed world.

        1. Yves Smith Post author

          Wowsers. You have a VAT called the GST. That’s a sales tax of 10%, and payroll taxes of 4.75% to 6.85%. Your gas taxes are much higher than in the US, to the degree that my fuel bill and for my apartment was markedly higher than in NYC despite the dollar being super strong when I was there. Most municipalities tax water, while that is rare in the US. I can’t find data on how property taxes compare to those of the US, but they do exist. Wikipedia confirms they do. They are land taxes.

          And in the US, unlike Oz, state and local taxes (meaning property taxes) are deductible against Federal income taxes, as well as mortgage interest payments.

          An international tax expert confirms that the US has the lowest effective tax rates of any advanced economy. She keeps telling me that’s why I can’t afford to move anywhere I’d want to move if I am still working.

          Stop making stuff up.

      3. Anon

        Yves, a FYI for you here. I was told by a major bank in Australia that they were happy to lend me AU$1m in mortgage. I have absolutely zero ability to repay that and I am nowhere near stupid enough to take debt like that on. Given some of the people I have seen buying $1m+ properties on lower incomes than mine it mean that , unfortunately, others do not perform anywhere near as much analysis before signing off.

        1. Yves Smith Post author

          I heard similar stories when I was there…banks basically pushing prospective home buyers to buy more expensive properties because they could “afford” them when the person telling the stories to me had run their own budget number and thought the banks’ suggestions were reckless. We had the same thing in the US but only in the 2005 to 2008.

          1. Anon

            The biggest issue I have with it is that the lending seems so systemic – too many people on lower incomes living in very expensive, albeit overpriced, homes – that you almost want to join in because the crash would be so huge you cannot fathom how a Government could not try bailing it out. It really is that bad here. Not to mention that there are areas of Brisbane such as Teneriffe/Fortitude Valley/Newstead where there are block after block after block of units being built. Oversupply anyone?

    2. clinical wasteman

      Pack you car and drive to Hobart. Float your Ford Falcon, row your Holden Commodore to the Torres Strait Islands … you’re sinking, you’re sinking, you’re sunk.
      What ‘cheaper city’ where both words actually apply? Those are gilded Exurbs over that Harbour Bridge.
      Remind me again why the asset-poor in any part of the world should take our punishment like a cringing Battler, surrender the cities to physically and spiritually Gated Communities and move to a village? Or maybe a Township, a shack settlement? SA (not South Australia)-type Pass Laws never really died, they’re making an ExPat comeback everywhere!

  8. paul

    Luck is important for the individual, but policy matters more to the players.

    In the uk the ideal of ownership has become paramount, as the UK housing review 2016 confirms, at 42.6 billion great british pounds:

    “The shift towards supporting the private market and homeownership is almost total……it represents easily the biggest ever programme of government support for private housing”

    Other policy changes:
    1% annual cuts in social landlords (housing associations/councils) rents
    Right to buy extended to housing associations
    Councils to prioritise high value sales
    A net fall in social provision of 7% (2012-2020) through sales/demolition netted against new building.
    The arbitrary reclassification of housing association debt by the ONS to the national accounts (OMG! the deficit!) will place them squarely in the treasury’s crosshairs.

    Basically, the policy is to scoop the credit worthy (mainly through draining parental assets) onto the ark and the rest can make their own arrangements.
    From there we will see the inevitable advance of moribund landlordism.

  9. ambrit

    “[Construction industry jobs] are no longer working-class occupations…”
    Over in the Antipodes perhaps, but here in the ‘Land of Dixie’ at least, the oversupply of semi skilled Further Southern labour has reversed the dynamic alluded to. The spectre of rising inequality haunts American construction occupations as much as it does Wall Street versus it’s ‘marks’. Some contractors end up living like Roman Empire Patricians while their minions struggle along like Mr. Panks from Dicken’s “Little Dorrit.”
    One observation concerning the “public housing” part of this witches brew; with the rise of “public private partnerships” in the apartment field, what good are semi outrageous rents when there are no jobs, nor public provision for housing, to underwrite said rents? Given the cheapness of the apartment stocks being built now, as in physically abominable construction methods used in pursuit of ‘investment yields,’ I forsee a severe lack of minimally habitable tenements for the next generation of the ‘un-labouring masses.’ Hovels would be a charitable description of the future lower classes housing stock.
    May I suggest a Class War Corollary to the Neo-Liberal Rule #2?
    Instead of “Go Die,” it should be “Go Kill.”

  10. Herkie1

    I know anecdotally that my housing budget as recently as 2013 was 850 per month here, for a large and pretty luxurious first rate apartment. I could have rented a typical 3/2 house for $1,000. This has now risen by about 50% in just those three years time, and over 70% since the housing collapse of 2008. I pay now $1,300 for a doghouse I am very unhappy in, and all this is actually sort of academic because the vacancy rate for mid market rentals in this metro is well under 1%, in fact there are now only a dozen or so unique ads for mid market housing on any given day. In this area (population 230,000) Craigslist is loaded with hundreds of ads per day of people/families BEGGING for housing affordable or not.

    An hour up the interstate is a small semi rural county that is considered to be in the top five places in the USA for rent stress, the proportion of rent to income, and so it is not all that ironic they also had one of the largest mass shootings in the past few years.

    Now add on about a 40% increase in grocery prices, 50% increase at least in both health insurance and auto insurance since 2013, and the government giving us our first raise in COLA’s in years for 2017 of a WHOPPING 0.3% for me that comes to a magnificent pile of 14 bucks per month. These price increases are at least as high as anything I saw during the Ford/Carter administrations, yet the Fed claims there is no inflation. Result? A loss of living standards of about 40-50% And the powers that be wonder why Trump was elected? For all politicians and policy makers I have a hint for you, denial is NOT the same as a functional economy.

    I will admit that some of this is regional and unique to this state. Other states may have experienced higher or lower rates of goring of the middle and lower class. One of the causes was a law that said landlords could not discriminate in renting based upon sources of income. This effectively forced all landlords to accept HUD Section 8 vouchers for their rentals, and the response by landlords was two fold, make move in costs not covered by HUD so high that people on assistance could not afford them, and to raise rents to the point where the government will not pay it. To a lesser degree they also simply took units off the market.

    For food increases it was the Safeway/Albertson’s merger that triggered large and continuing cost increases to us. They were our only two major chains and once combined they could and did simply jack up all prices, some astronomically, and many staples are now well more than double what they were before the merger, their in store baked breads for example are up more than 300%.

    I had already planned to leave the region last year because I knew if I stayed through 2016 I would be forced to live in my vehicle in 2017. Now that the election is behind us I still plan to leave, but now to a different hemisphere. I wonder what it will do to rents when the former USA is a smoking crater that glows in the dark?

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