Property bias

Published in The Australian (Sydney), 4 December 2009

Whenever the Reserve Bank of Australia lifts interest rates, newspaper editors ask their reporters for the same story: “Find me a young family struggling with higher mortgage repayments.” Newspapers have a big heart for heavily indebted homeowners. Perhaps occasionally they should show equal compassion for tenants and savers.

Price increases in any other market are called inflation, but when house prices go up the market is said to be healthy. But house price increases are only shifting wealth from non-owners to owners. Rising houses prices never create wealth. In fact, they make tenants wishing to buy property worse off.

With interest rate rises it is the same bias. You will always find someone complaining about higher repayments. But have you heard a saver complaining about falling interest rates? Probably not because savers don’t matter in our property-obsessed society.

The underlying bias translates straight into policy. Take taxation: if you own your home, you enjoy the returns on your capital (the imputed rent) tax-free. If you are a saver, you have to pay income tax on the interest, even on that part of the interest that keeps your capital stable in real terms (the inflation component). Homeowners, on the other hand, can eventually realise most of the capital gains on their property tax-free.

Our addiction to the property market needs to stop if we care about housing affordability. And if we care about the level of private debt, we need to make saving a much more attractive option for young Australians.

And to those who complain about rate rises, we should tell the truth: if you can afford mortgage repayments only at emergency rates, you should have never bought a house.