Wry & Dry

The absurd optimism of home-owners

W&D likes optimists.

But this is ridiculous.  A recent survey [1] of Australian home owners showed an amazing optimism.

property pricesIt's a pity that the survey didn't provide more granularity for those in the 0-10% range.  Nonetheless, the forecasts are sooo optimistic.  And with all of the talk about an overheated property market; property bubble, etc, W&D just loves the only 4% who think that property prices will fall.  

There are two sources of residential property price optimism.  

Firstly, those who have invested via their self managed superannuation funds.  Like any superannuation investor, they need the value of their investment to rise, because their future retirement income depends upon the outcome.  And so they express that need as a forecast.  Or maybe just hold up a mirror to what the property spruiker told them.

Secondly, residential owners, who would like the value of their home to rise over the long term. 

Overlay this with the fact that Australia's household debt-to-income ratio is 186%, among the highest in the world.

"So what?" W&D hears some readers exclaim.

Well, sooner or later, the music stops.  Which means that interest rates will rise.  And that home owners will get squeezed.  Not that the banks are going to either toss mortgage defaulters out of their homes, or indeed fail.  It just means that so much cash has been invested in unproductive investment that it will be lost.

Remember that borrowing brings forward future expenditure.  More spent today means less spent tomorrow, unless today's spending is productive.  Bidding up the price of existing homes is unproductive.

Which is why W&D supported the Labor Party's recent election position on negative gearing i.e. only for newly built homes.  But that rare plank of Labor Party economic wisdom was sawn in two with the election result.

[1] UBS Securities Australia and UBS Evidence Lab surveyed 1,228 Australians who’d taken out a residential mortgage in 2015 or 2016.