Killing the Housing Market is the Key to Covid Economic Recovery
The recession is here, business owners are walking out on leases they can’t afford, tourism is struggling to maintain even the ghost of its former self, but the one thing still going strong is the housing market.
The resilience of the housing market shouldn’t come as a surprise. In uncertain times, people look to areas of certainty. The world’s population continues to grow while the amount of land remains fixed, which makes housing a pretty certain investment under most conditions.
With no capital gains tax, rental income able to be offset against interest payments on your mortgage, and many other financial benefits, housing has always been a tempting investment for anyone with spare cash. During this Covid-induced recession, when other options have grown less certain, property investment will likely become even more popular.
When people weigh up how they want to invest their money, property competes with other options, including starting a new business. Of the two, property is the obvious choice. It has a much more certain return on investment, has favourable tax structures, and provides multiple earning streams (an immediate one through rent, plus an eventual one when the house is sold and capital gains are realised). Housing is also a relatively passive form of income. There are no twelve-hour days or late nights, frantically working to get the books to balance and ensure there is enough in the bank to pay staff at the end of the month. With all the relative benefits, it is no wonder people with spare cash are choosing to invest in property.
For the economy to recover, the exact opposite is required. We need people to start businesses, to innovate, to employ staff, to engage in trade with other businesses, and to keep money circulating through the economy. Every business expense is someone else’s pay-check, every dollar of revenue earned will provide income to the business owner and employees who will then spend that money, further bolstering the economy. All this additional flow of money is taxed every time it changes hands, allowing for more public spending, and further contributing to the economic recovery.
A house, in contrast, is a non-productive asset. It sucks away cash in the form of large mortgages that need to be repaid, and then simply sits there. It creates no value, employs no staff, and doesn’t contribute to the economy other than by taking the weekly income the tenant would otherwise spend on local businesses and funnelling it into the owner’s mortgage repayments.
Much of the country is currently facing a housing shortage, and a house obviously provides housing. However, when an investor purchases an existing house, they are not creating housing. At best they are shuffling the deck chairs on the titanic, and at worst they are making the housing market even less affordable, for both tenants and would-be home-owners.
We shouldn’t be encouraging investment in property if we want an economic recovery. Money that is hidden away in houses is money that does not add to the economy. Ever-increasing house prices means an ever-increasing amount of money tied up in housing, and therefore unavailable to add to the productive economy that benefits us all.
Through our laws and tax structures, we have turned housing into the best investment option you could possibly choose. In addition to missing out on the economic stimulus from all that unproductive cash, we are also inflating rents and house prices above what they should be, thereby turning what should be a fundamental human right into a commodity. Rental prices are such that it is common for people to spend over half their weekly income on having a place to sleep, and home ownership rates are down.
This is a travesty of our own creation. It is fixable and it needs to be fixed.
Wealth taxes, limits on investment property ownership, and better directed tax structures can all make property less attractive as an investment, and more affordable as a place to call home. This will not only fix our housing bubble, but will also direct surplus cash into new businesses and back into the economy, helping us recover from the economic impacts of Covid, and helping to build a more resilient economy into the future.