Is Australian housing really a ‘Ponzi’? June 16, 2023

32:18If you're trying to stop people spending and they're already saving 20 % of their income, they'll save 19%, then 18%, then 17%, then 15%, then 13%, 12%, and 5 % on the way to where we are now. And they'll absorb all of those interest rate increases in inflation by saving a little bit less until you can't save any less because there are no savings to be had. And then, only then, economically, and some people already in this space, some people listening will say, hang on, I've been cutting back for 12 months and again, I'm not suggesting there is any way, not everyone is average and I'm not suggesting it's not impacting anybody, but at an economic level, it really just, that number really stuck out to me, mate, as now stuff is getting real.

32:57This is the RBA spent, I think it's fair to say, people can disagree, they should have gone harder and earlier. So we should have been at this point more quickly, maybe even six or seven months ago. But I feel like we're now at the point where the RBA has finally got to where they wanted to get, which is we can now fine tune a little bit because we've taken all that excess saving out, we've taken all that excess spending out, now actually can have the impact we've been trying to have for more than 12 months. Yeah, I think that's all fair. And you're right with certain things, at least for a time, masking what else is going on.

33:32You know what I always find interesting too is sort of the demographic angle here because we have a pretty sizable chunk of the population. I'm going to generalize here. You'll guess which generation in a minute. Oh, God, here we go. But largely debt-free, essentially debt-free, with the beneficiaries of decades of aggressive asset price appreciation. And if you're traveling around the country in a caravan, visiting your various investment properties... You're a cynical, cynical man. But my point is, I mean, I saw a really great tweet the other day I was hoping up the Gold Coast, just like boomers, boomers everywhere, spending like crazy.

34:15And I'm not having a go at the generation. I mean, you play the cards you're dealt, right? And put on you, right? I would have done the same thing. You worked hard, you saved hard, you bought your house, and then all these structural factors just made you asset millionaires. Very large, significant sums. People in just very ordinary, average-paying jobs from 30 years ago are probably millionaires if they paid off their house, which when you're buying your house for four times average income wasn't that sort of hard to do. And this is what, again, makes it so extraordinarily difficult from a high-level policy perspective because who cares if the interest rates are up a quarter of a percent more, right?

34:57Like it doesn't matter. You know, maybe my returns aren't as good. I'll do some rent increases or something like that. But there are people out there, I think it was the stat is 70 % of renters are in stress. Something like 48 % of mortgagees are in stress as defined by, I think it's once you hit a certain threshold of disposable income going to service that. And then you've got a whole other segment and it's just like, we're doing fine, thanks. Properties at record levels. We've never been richer. I've got no debt, so I don't really care. In fact, interest rates going up means my term deposits and my cash investments are actually doing better for me.

35:39But they also are the households that aren't forming new households. So you're probably less – it is – they're going to be – I would suggest something like an Adairs probably is going – all those Temple and Websters, all those that are very much predicate on new family homes and stuff coming up, people needing to furnish those, is probably going to be more impacted than, stupid example, caravan sales. Yeah, anyway. So is there a fair point to be made in that, in looking at different segments? Because I think we're always, any commentator is always, and I'm guilty, more guilty than anyone, of contextualizing everything through your own lens.

36:28or this is how it impacts me. This is what my peer group is experiencing and seeing. Therefore, that's the reality of it all. Exactly. That's right. And I've got some younger friends who are in, you know, more the millennial sort of generation, and they've got very different take. And then I've got, you know, people who are, you know, plus 55, a completely different take. Yeah. Yeah. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener. i think what we're experiencing mate is a more more extreme sounds too extreme in itself so i'm trying to find a better way to phrase it i think the distributions are widening can i say that using some economic jargon without and i say that to not sound jargony and like i'm trying to bs anyone or you know sound smart but i'm trying to use the right language kind of moderate what i'm trying to say i don't you know the i think the the range of experiences we're having is getting broader now you know i am very aware that when i was when i was a kid uh mum and dad mum worked dad worked two jobs we had seagrass matting on the floor and flannelette sheets for curtains right you know and it's not to say that you know we did it tough or they did it tough or the strip shop having the smashed hours or any of that sort of stuff i guess i just want to make the point that back then i think the same when when rates were at 18 in the 1990s early 90s there were people who owned their homes then who had who would you know we could have had the same conversations just change the change the generational labels back one or two notches and we're having the same conversations right the boomers are in trouble the silent generation are fine you know gen x is the kids and you know it's that there is something of an echo i think um that goes through these economic cycles we talked about cycles cycles have always happened and they've always been winners and losers different parts of the cycle and you're always better off having no debt than debt unless by the way you're in a highly inflationary time and you've got a wage increase which are hard to come by um so but you know and those things are true i've spoken to you know people who invested in either their own or investment property during that period and so i just i just bunkered down and got through it and i'm glad i did because look what's happened to prices since and now whether that's good luck or good management we can argue about or maybe we wouldn't even argue probably agree on it but um i think it's so i guess i'm just saying it's always been it's always been hard there's always been your home ownership hasn't changed dramatically in proportional terms um roughly a third renting roughly a third only roughly a third paying a mortgage is not that dissimilar um home ownership broadly hasn't yeah there's a couple of percentage points moving that's big on a population level of 27 million people so it's not nothing um so i think i think the patterns are similar i think what i what i think we know is that the the as i said the distribution is widening there are maybe because there's simply more boomers populated in terms of heads of population because of the boom There's more of them.

39:12And they've been very fortunate over the last 40 years to be the recipients of some meaningfully changing demographics, including second incomes, lower rates, higher LVRs, lots of things that have worked in their favor. So I think they're more fortunate than their parents would have been in this same circumstance. I think their kids are less fortunate than they were in the same circumstance. I'm not sure the shape of the distribution is that different. Probably fatter tails, right? the kind of idea of you know we're just stretching things out a little bit more there's less of a bump in the middle i think the challenge for me is we are we are the other thing i don't get back in population for the sake of it but you know we it was easier to live in the cheaper suburbs 40 years ago because the cheaper suburbs were 25 30 kilometers close than they are today because the sydney population the mobile population the adelaide population chusha city has just exploded since then right um again sweet my mum and dad's place they bought it was 45 minutes drive from the city now the same place with the same circumstances probably now an hour and a half from the cbd and so you know yes the the boomers were like well just move out to the suburbs we had to do the same thing i just i just feel like the i feel like the the to use one of your favorite metaphors the rubber band just being stretched a little bit further yeah it doesn't mean it's going to snap i don't think it's at an extreme i don't think it's going to snap i don't think we're necessarily in for anything bad it's always possible but not very likely in my view but i think that's the challenge economically is just thinking about where you could have the impact and because of that that stretching if you like there's more money being spent and wealth being created at those ends i guess one in particular as you say the retirees are simply i'm sure the boomers are richer today than their parents were at the same age oh you know x years earlier i'm a question yes as a proportion of economic activity and spending and whatever they are just a larger chunk of that and it does mean that i guess then by definition for the rba to have the impact it wants to have it has to go harder at the pieces of pie it can control which is in this case is mortgage lending and business lending uh you know it has to do relatively more in that group to have the same sized impact than if the population had been distributed differently as it was 30 years earlier yeah but that's what's so brutally unfair about it right now it's always been i guess my point too though i guess i'm making that point that we say it's unfair and it is and it's probably less fair than it was or more unfair yeah that's that's my point i guess the shape the shape is not that different it was the boomers who paid 98 back in the day would have been unfair relative to their parents who paid nothing there's always someone who gets whacked and it's always the mortgage payers at whatever generation yeah i think it i think it's it's definitely more extreme it's it there is as i again having a chat off air i just there there is a certain reality mathematical reality to these kinds of things.

42:01So the average house in Sydney is 1.2 million today. The average income in Sydney is$92 ,000. That's 13x, right? So let's say I just graduated from university or whatever and I get my first job and I'm right on. I'm just straight away. I'm out the door. I'm on 92K a year, which is a really good outcome for a graduate. I was going to say, mate, I think it averages averages, right? So half of the incomes are below that number. Yes. And that's for everyone, not just graduates, right? So I wanted to make the generational point here and just contrast it with what had happened in previous generations.

42:35So anyway, I've done brilliantly well. I've studied really hard. I've landed a fantastic job first day out of uni and boom, almost 100 grand a year. Now, I've got to rent somewhere, right? I've got to live. I've got to eat food. I've got to do it. Probably I want to not just eat two-minute noodles. So I want to have a little bit of joy in my life as well. But think about living in Sydney where you're probably for an average two-bedroom unit anywhere, you know, is going to be somewhere around, depending where you are, but anywhere between$600 and$800 and could be a lot more than that, by the way.

43:09So if I want to save a deposit, a 20 % deposit, so I avoid the mortgage insurance, usually it's traditionally considered, you know, about the minimum that you'd want. That's changed a little bit. But that means I've got to save up$240 ,000 on$96 ,000 a year. So that means that if I can somehow be really disciplined, and I listen to my elders and I don't eat avocado on toast, and I'm going to take 10 years to save up$240 ,000. Now, let's not even factor in inflation. Let's just say there's zero inflation. So that$24 ,000 in purchasing power is unchanged. I've now got$240 ,000 after 10 years. right?

43:50So now I'm probably in my early 30s and I'm in a position to finally do this. Now, you've also got to factor in, well, prices will probably move. If you want to take some people's heuristic, you know, property doubles every seven years, apparently, which is just absolute bubkis. But let's say it even grows at, you know, two or 3%, sort of more in line with longer term traditional averages. That actual, that path gets stretched out even longer because the 10 % is now much more than$240 ,000. Anyway, maybe I finally get there in my mid-30s, just working my butt off, found a partner, they've worked their butt off, we've pulled it all together.

44:29And now I've still got 20 to 25 years of repayments ahead of me, just before I can finally own it, before I get out of the workforce and not long after that, maybe drop off the... It is a brutally impossible situation, right? And then you've got to factor in, well, how many people are on$92 ,000, right? I just think the maths is very clear on this. It is diabolically sort of difficult to sort of say, well, it's the average and we just have to do it. And there'll be this big chunk of the population, which is a slight annoyance for another part that's just going to like grind their faces into the dirt, you know?

45:11And then the government sort of sits there going, oh, yeah, he's not a very nice guy, Mr. Lowe. It drives me insane. I agree with that too. You know, where it's kind of like there is a job, I suppose, for interest rate policy trying to affect all of these things. But again, the fiscal side of things is the elephant in the room that virtually no one seems to speak about. And it's incredibly frustrating. Yeah. And we've done that before a lot. I'm 100 % with you, mate, that using only one single policy tool when there are dozens and dozens and dozens available for any government who seeks to find them is absolutely maddening, as you say.

45:49I want to throw you, we're way off topic, but that's what we do here. I want to throw you a challenge because I don't know the answer. And that is that what we have in Australia, around the world, but more in Australia, it seems, than anywhere, is what is effectively a slow-moving perpetual auction of property, housing, land, the property market, right? The property ladder, as you like to call it, for those long-term listeners. It happens regularly, right? And every time we... And we've kind of talked about this a little bit before. Every time we buy or sell a property, we sell to the highest bidder because we're bound not to and the highest bidder gets it because they want it more than i do and they can afford it more than i do so they get it more before rather than me and that sets my expectations of the other properties and then around and around and around and around we go on one level mate this is this is pure capitalism it's pure markets doing what markets do now interest rates aside and we shouldn't just put them aside let me explain why i'm going to put them aside for a second interest rates aside the market decides what it wants to pay for housing what it thinks housing is worth and we all sit around and go, I'll pay that, I'll pay that, I'll pay that, I'll pay a little bit more.

47:07Honey, you've got to go out to work because the housing is that expensive now. We can't afford you not to work. Okay, cool. I'll go and work. Great. Now we can bid$1.4 million for that house. We'll mob down the road again, bid$1.45 million. Okay, now here we go again. Around and around we go. There is some crazy mixed up, screwed up, and I use other words if this wasn't a pg podcast logic where we all screw each other over and it's no one's fault because we all do it and we'd all do if we had the choice if we were the underbidder and we won because the the hybrid or we'd happily screw up the next guy and he'd screw over the guy after that not not deliberately because we're trying to screw them over just because we want the house and we can afford it so we do at some at some level that's just what the um economists call is it um express choice price discovery or no that's demonstrated preference so yeah you can sound on a sheet i think how things do with x your demonstrated preference is what you actually pay what you actually do right and so at some level let's say interest rates didn't exist or let's say they were 25 the market at some level is going to say i will i am prepared to pay x percent of my income combined household income by the way to buy the house because i just want it and that's I'm going to forego the car or the holiday or the whatever or the Twinkies to buy the house because that's the thing I'm prioritizing.

48:28At some level, even with all the fiscal policy in the world, and yes, we can argue the interest rates, the interest money is dead money, but that aside, let's almost assume rates didn't exist. I am not so sure we wouldn't collectively just bid up prices to the level they are now anyway because we could. If rates are zero, I can afford to borrow even more and pay the same amount of my income off because i've already decided i'm happy to pay whatever it is a month to to you know i mean my wife can afford this much per month what can i buy for that much i can buy that house there okay you do the same you can buy that house too so okay we bid against other someone eventually gives up i don't know how you fix the house i guess i'm saying i don't know how you fix the market because i don't think it's i don't think it's an interest rate problem i think using rates to cool the economy is a separate question and it's a very good question that's what i've talked about before and i completely agree with you but even if we say we're going to cool the economy some other way and rates as a result therefore are lower excuse me there's a large portion of the population goes great i can now pay more which is exactly what we did during 2021 when we all was a 22 whichever year it was when house prices went up 24 because we all went beauty we can go and borrow more let's do that there is something just i don't know i don't know the i genuinely don't know the answer man you can you try and cap loans at a certain proportion of income but then you know to artificially hold prices down but all you then do is prioritize and preference the cash buyers i just i don't know how i would change housing prices because affordability is a function of price and price is a function of affordability if i can afford to pay more i will you can too so we all do and so here's don't we just end up in the same place i i don't know how to fix it is my is my quandary no i've got i don't pretend to have the answers but i i would say that macro prudential tools are you know vastly underused so what do you come back to first we'll start at the beginning what do we want here as a country you know well we we'd like increasing prosperity generally you know that requires security of housing and affordability of houses as a base layer really for everything that comes after that it's very hard to be a productive member of society when you're when you're living in your car right or under incredible rental stress or whatever it is um so we so we want that We want sort of, I guess, rates of borrowing to be at a level which is encouraging of new business creation and job creation and all of these kinds of things.

50:46So rather than this one blunt tool, I would just sort of say, well, listen, there are restrictions on how much you can borrow. There are buffers above official interest rates. There are certain things. So what we do here is we stop inflating these asset bubbles, yet we still can have an impact in the areas that are more – it's just being more targeted. So there's no perfect answer here. I'm just sort of saying we've got this sledgehammer on one hand of our tool belt, and on the other we've got these more surgical instruments. And it still depends on how you apply them. But I guess I would very much sort of start from that standpoint.

51:26What do we want and what's the best way to sort of go about it? The thing that always I think is really a sign of something broken is that the thing that we're talking about here, it's not that every Australian is wanting a quantum computer or a probe that will go to Mars. We want a patch of dirt that has some bricks, timber and steel on it, right? That's what we want. We've had this technology for 5 ,000 years, right? You know, why in an increasingly prosperous, rich society is the most basic of goods, really? You know, since Fred Flintstone and Barney Rubble were around, I mean, you know, they had a TV.

52:16They had a roof over there. So this is not complicated stuff. Listeners, how do I tell Andrew that Barney Rubble and Fred Flintstone aren't real? That's my Quanji right now. I'm not sure what I say. I'm not sure how I have this conversation with him. No, I agree. I guess my point though, mate, is that that's true in a utopian communist assumption. No, no, no, no, no, no, no, no. I'm sorry. You were taking the free market angle. Like if markets were left to do what they want. So this is a stupid example, but just to take it to the extreme. Absolutely no regulation. I mean, 100 % brutal free market capitalism.

52:47Find a patch of dirt, you go for it. You build whatever you want there, however you want. I would imagine you're going to see houses pop up everywhere. Now, this would be a terrible policy, of course, but I'm just trying to use a ridiculous example. You would find supply radically improving because that's what free markets do. They respond to these kinds of things. Massive demand. Are we wrong to demand that? No, we're not. It's absolutely a fundamental human right to demand a reasonable place to live in safety and security. and you would find that builders, developers and the rest of it would just come to the party.

53:25So on top of all of these other issues that we sort of talk about, we have sort of, it's a whole other topic, but we have sort of zoning regulations. We have, you know, there's just these, I'm saying, talk to a builder, right? There's a thousand of them. They're doing pretty well because there's a lot of wind in their sails. There's a very strong tailwind there, but still like the margins are fantastic in this industry. And interestingly enough, when you look at the cost of building new property in Australia, it's very high compared to other places of the world. So again, what I'm saying is, is that it needs an intelligent look at things.

53:57What are all the different causes here? What can we target more specifically? What are going to achieve the kind of end goals that we want rather than let's just keep inflating this massive Ponzi and doing everything we can because we've now built the entire foundation of our economy on this you know the end of the day that's the we that's the we problem i have made is i don't i don't think it's i don't think it's a we because i don't think it's policy like that that's that's that's almost the right no it's it's a policy because people are going to rightly i think to some extent i want a house and that is a very normal and respectful thing to sort of want i want to raise a family i just i want a house right i just want actually i just wanted security of of sort of of tendency and why is it so impossible to sort of say okay we can do that for you we can reduce the barriers to get into that without having to bludgeon everything else in the process I'm not explaining myself well no you are I guess it's the we thing that I guess I don't know how we solve because the way as you rightly point out regularly the economy is not one thing it's lots of little things and i guess the lots of little things at the moment say i think housing is worth spending x percent of my income on oh that's right because that's yeah that's how much i that's how much i want to spend and i i could choose not to buy the house right every one of us could you not to buy the house most of us should actually decide to actually work a little bit less spend a little bit less and go and live in the country and have a healthier happier life but we don't because the rat race is the rat race and we all feel like we that's the race we have to run because you win In the rat race, you're still a rat.

55:38That's the problem. Exactly. And that's a whole different conversation as well, but one worth having. I just, I still, you know what I mean? Like I think the express preference, the reveal preference is, I will spend this much on a house because I can. And I just, I think if we said to people, let's drop rates and let's use other fiscal policies to restrain the economy, that would be fairer and better and more appropriate and I would be all for it. And I think as a result, we would actually see house prices increase because people go, beauty, rates are now 3 % again rather than 5 % so I can now and I think we would go straight back to that I guess that's my point is our reveal preference is you know it's not rates themselves out of the problem it's us and on one hand I'm saying maybe that's okay frankly on the other hand I'm saying I don't know how we resolve something when you and I might say if we designed a society from scratch we would have people behave a certain way the reveal preference is we choose to behave this way we choose to prioritize housing we choose to bid it up because we can therefore you know So if we change the rate settings, we still have the same problem with house affordability, I guess.

56:39Yeah, you're 100 % right. I had a brain snap before. Let me come at it again. Stop it. The preference that people have is absolutely fine. It's not a question of what they want to do, but it's a question of what they can do. And that's where the system settings are important. And I am very firmly of the view that what most of us tend to do is we say, I want a house. Really good starting point. Go to the bank. Mrs. or Mr. Bank Manager, how much can I borrow? You can borrow this much. Great. That's what I'm going to go out and do. Oh, Mr. Politician, I can access my super? Fantastic. Oh, you're going to give me a first home owner grant?

57:17Fantastic. So we're coming at it from the right place. And yes, people are going to bid to what they're able to do, but we have given them the capacity through system settings to bid much more than they would otherwise be able to. CBA is bigger than Goldman Sachs, right? 70 % – they are a – for a country of, what did you say, 27 million people, they are a monster. And then when you look at the oligopoly, which is a very deliberate term because it's what it is, right? It is, right? The oligopoly of the big four banks and maybe five if you throw in Macquarie, they are just trillions of dollars in assets, right?

58:00And 70 % of CBA's loan book is residential property. And that wasn't always the case. I think back in the day, it was more like 30 % or something like that. So what we have done, not deliberately, but it's just the way things have rolled out. Usually with politicians with good intentions, we want to help Australians get their home. We've got to deregulate finance. We've got to do this. We've got to do that. Very kind of you, but let's go with that assumption. Do you know what I mean? Like they have, we have unintentionally fostered conditions where we have allowed people to spend far more than they otherwise would have want to.

58:36So I'm not blaming people for doing what they've done, right? Like they have come from a very sensible starting point. But we've sort of engineered the system in such a way that it's just, I used the term before you offer that anti-fragile kind of thing. We are very fragile. that we're walking through a tinder dry forest that hasn't had rain in like two years and you know we're smoking cigarettes it's it seems it seems like that it's that it's and and it and we are now in a situation where it's kind of like oh okay well things have probably got a bit too crazy we need to fix our housing affordability it's like okay how do we fix housing affordability i don't know but we definitely don't but we definitely don't want houses to get cheaper We want it more affordable, but we definitely don't want house prices to go down.

59:24Now, if that blows, doesn't blow your brain when you really think about it, I don't know what to tell you. And that's the impossible situation that we're trying to sort of wrestle with. Let's keep house prices from falling. In fact, let's keep them rising. We don't want them to go sideways, right? But let's increase your housing affordability. Go. I agree with you. politics aside i guess i'm wondering i guess my point is i'm not sure you could like i well i'm not sure how you would so so let's say we want to improve affordability and including including maybe house prices dropping right what what are you going to do to me to stop me paying as much or more for the house when i get a auction next weekend i mean short of sort of you know command and control economy stuff of show me your passport i'll give you 15 housing stamps you know use those number of stamps on something we could absolutely impose price caps and whatever else if he chose to i suppose yeah but if you said to me you know you can't you can't bid more than x for that house i'd say well how how do you how do you suggest that in a democratic society where i mean you could you could just say well screw it i'm happy to repeal that part of democracy and say you know i'm gonna have the state set housing prices yep but short of that like i'll tell you what i'll do if i'm prepared to pay if i'm prepared to pay 40 percent of my income in house price for the house for a house yeah you set rates at one percent or a hundred percent i will still spend 40 percent of my income the amount of house i buy is probably different and we might all bid the house price down based on higher rates, but the amount of income I still choose to allocate to housing, that's the key one, right?

1:00:50How much are you going to allocate to housing? That is the thing that changes house prices far more than anything else or repayments more than anything else, I should say. Again, macroeprudential controls. And we're not doing it as a command and control kind of thing. Remember, these things were introduced to ensure economic stability because let run rampant, you introduce all kinds of fragilities into the system, which can bring us all down look at what happened in the u.s what re-watch the big short right that's that's why we have these things and and and so it's not a matter of saying you can't pay more than 1.13 million dollars for a house in this suburb it's not that's stupid i i disagree with as a renter i disagree with the greens policy of rent caps and the rest of it like it's it it doesn't it good intention but it doesn't it doesn't make sense so it's not about it's about sort of saying we want a robust system.

1:01:39And people can spend, if you want to spend 40 % of your money on your house, absolutely have at it. It's your choice to do it. And I'm not going to question your desire not to do it. But to ensure broader economic stability and longer term prosperity, I probably would say that I think we should have a three to 4 % buffer on current interest rates to ensure that we protect people and the system for unexpected rapid increases in interest rates. Because guess what? That happens from time to time as we're relearning. I would probably ensure that But there is a certain, we use whatever benchmark you want, price to income or debt to income or whatever.

1:02:13Something that just helps keep things, just put certain guardrails up to allow consumers to do whatever they want. But they operate within that context. Not because we have to say from up on high that this is as much as a house should be worth. But to sort of say we want structural strength within our system. And then let the free market have at it. But what we do is we give free money to first home buyers, which just ends up going into the pockets of vendors. I agree with that. We allow people to tap into their super. We reduce the serviceability buffers. We reduce lending. I mean, that is the dumb part of all of this, all at the same time of increasing interest rates.

1:02:53I mean, we're pulling in opposite directions here. If that's not madness, I don't know what is. No, I'm not defending any of the past policies. We've both been pretty vocal on that debacle in the past. I guess my thought though, mate, broadly is we talked about the widening extremes or the growing distribution, how we want to define that thing, right? If I'm a cash buyer, if I'm a boomer who's driving the caravan in the Lankras around the country, I don't have any lending constraints if I want to sell a house and buy another one. Yeah. my concern is that that policy as proposed if i'm willing to spend 40 of my income on repayments or whatever the number is you you might only be able to borrow a certain amount but that's that almost makes the the first home buyers problem worse rather than better because you say to them you know nuts to you you can only borrow 90 of the house price or x times your income or combined income or whatever the numbers are okay cool well it turns out i'm actually now 45 i already own i have equity of half a million dollars in my house so i'm going to use that i'm going to borrow 90 of the next house and so i can buy i can pay more for that house at some at some market level i don't know and maybe i'm maybe i'm worrying too much about a smaller issue but it just strikes me that all that does is penalizes borrowers even more against those with cash who are the very group we're saying need most help because those with cash have already got too much of the economy that's where i worry about those lending uh criteria being artificially applied to a a group and another group because i don't need it and again i'm not saying we should restrict the other group either and we're both you know we're unity ticking on price caps that's the bit i don't i just i i'm not saying targeting group i'm saying across the board but it does target the group because by definition what you're saying to the first group is i'm going to limit how much you can buy for your first house because you're you've got a small deposit you're desperately saving for it you're doing your best once i've got some equity i get i get to leapfrog over all those people because they're restricted ah i can only borrow i can borrow you know uh whatever buffer you apply eight percent buffer yeah i can i've got a larger income already i already have half a million dollars of equity in my house so when i borrow at an eight percent buffer for the next place i only need to borrow 70 of the property price because i've got already some money great now i can borrow buy two million dollar house and the poor first-time buyers even further screwed because we're artificially constrained.

1:05:13They could pay more. We won't let them pay more, but we'll let the cash buyer, because we should let the cash buyer pay whatever they want with their cash. It makes the whole dynamic worse. Now, what you're forgetting, I hear what you're saying, but I think what you're forgetting here, let's do a thought experiment, right? So let's take every single potential buyer out of the market. Yes. And we'll just leave those that are debt-free or at least with huge amounts of equity in the system. So they own a house and they probably own multiple houses. Yes. Right? And so the market is for you guys, right?

1:05:40There's no new money coming into the system. Now, again, free market dynamics would suggest at a point that just caps out because it's sort of like, well, we're just flipping it to each other here. We're both in the same situation here. So you need fresh money to sort of come in to sort of elevate those things. So I would imagine under that scenario, you actually would see prices stabilize much more and certainly stop running away at these rampant rates. And you might say, well, okay, well, I'll just buy up all the properties and I'll just lift the rent up all the time. But again, with rent, you run into very, very real affordability issues.

1:06:15It might say on your spreadsheet, if I just increase rent by 15%, it's fine. Well, guess what? 70 % of people can't afford the rent that they're already on, okay? So I don't know what the magic number is. It gets to a point where it's just like, I have the desire to rent this house. I just don't have the capacity to rent this place, which is underpinning the cash flows of these other parties. So this is where I think it does have an impact is that and this is what sort of propagates the ponzi to some extent is that we need to keep ensuring all of this fresh new money coming in whether that be credit or whether that we're accessing other government money or our own money in super or whatever it is we're putting new money into the system which keeps that's what a ponzi is it only goes when new money comes into the system right and i think that i can't let you call the housing market a ponzi unchallenged come I think it's got a lot of elements to it in the sense that people who make money today are dependent on new money coming in.

1:07:15If you're wanting to talk about But that's always been, but that's, Ponzi loses its, I mean, if that is true, sure, but then everything's a Ponzi because the economy's a Ponzi because you need new money coming in. At some point, the term loses its, it loses its, you know, meaning other than some generic slander, right? Like it's, you know, Hasn't housing always been that case? If you want the price of any asset, share prices, that must be a Ponzi because of new money coming in. Someone's got to buy the shares if I'm going to sell them. I mean, at some point, doesn't that just simply lose its official use?

1:07:47It's a hyperbolic term, I grant you. But I would say the difference with companies or the economy at large is that we're actually making more stuff. Extra value is being created. No value is being created for anyone. If my house goes, I don't have a house. If someone's house goes up by a million dollars, what value has been created for the economy? None. It's been created for me personally because new money has come in, but no money has been – Now, if a share market over long periods of time tends to go up, it's because all these businesses are far more productive. That is the true source of the wealth generation within that.

1:08:23What makes it more – and I do grant you it is a hyperbolic term, but where I think – I had to at least say something. You did. You did. But I think the distinction here is that this is a nonproductive asset, right? Yeah, right. And in terms of people coming to the expectation of doubling every seven years, that is only possible. Either the economy is growing at an incredible rate, you know, to sort of justify the affordability, or something else is going on there that relies on fresh new money. Where did the fresh new money come from over the last few decades? Well, we now had two income earners.

1:08:57That's a big pile of fresh new money. Yep. We now had better lending standards, lower rates, lots of new money coming in. Higher LVRs. That's what put it up, right? All within a context of diminishing, like the rate of supply was nowhere near the rate of demand growth just through population. So these are the Ponzi-ish elements of it. So is property a Ponzi? No, it's just a bit of land with some bricks on it. It's what we make it and it's what our expectations have become. and we've just got to think okay that's fine if that is your expectation but i would say for anyone with very bullish sort of expectations on capital gains growth is like where's the money come from and and i i am a hundred percent with you i have i think i think you know i don't expect horrible things and i'm not particularly anti-property but i i think that maths is or absolutely right i remember this a few years ago i should dig it up somewhere um if you look at what has driven the increase in house prices i did the numbers i kind of worked it backwards looked at average incomes like you had a second average income to a household you can afford to pay a certain amount more rates go from seven percent to three percent you can afford to borrow pay a certain amount more you can almost literally i mean you can't we said earlier in the podcast you can't do the algebra of a plus b plus c equals it doesn't work that way but you can kind of work that backwards and look at exactly the sorts of impacts those things had and diagnose i think it's you know and then it's almost in a funny way it goes back to my original point which is what we chose to do as a society is take earnings power and turn that into a slow running perpetual auction for shelter which is what we did right but as you say that has a natural the the rate the pace of growth of house prices reflects the changing inputs and demographics far more than does the asset class itself.

1:10:47It could have been cars. It could have been shares. It could be anything else. If we'd all chosen to throw our monies at Beanie Babies or footy cards, you would have seen the same thing happen, right? We've got more money to spend on footy cards and no more footy cards being released. Therefore, the price of footy cards goes up. Does it always go up every seven years? No, but it went up because we all had more money. We all cared more. We all put the money into the footy cards. That's what we wanted to do. There's nothing fundamental about the asset class in itself, which is your point. It's absolutely simply about the dynamics in the broader economy that allowed those things to be possible and drove that meaningful change.

1:11:23It doesn't necessarily mean, by the way, it needs to be reversed, in my view. It doesn't mean it needs to crash or go backwards. It just means that the growth that was exhibited over the last 40 years is very clearly in my mind, and I'm just reiterating your point, very clearly in my mind, just the net result of decisions made based on changing economic circumstances. Yep. Mean reversion is a really powerful concept. And so let's not, I don't know, I'm so critical of property. I do apologize for it. It's a point in time critique. It's not a general critique. But to make it fairer, let's look at the share mark.

1:12:00quickly to you actually on behalf of you it's your your critique as much as we're about property broadly your critique is almost always i'm put words in your mouth but almost always about the you're critiquing the expectations of those who believe there's something inherent about the gains available from property yeah not property in asset class not something to own not necessarily something not to invest in if as long as you're aware of what the returns are likely to be just the idea of the past being somehow predictive because of some immutable law that seems to exist Is that fair to say? Yeah, you're 100 % right.

1:12:29Take the word property out of it. So now it's asset X, some magical quantity, magic. Footy cards. Yeah, footy cards. You know, it doesn't really matter what it is, but am I going to buy a footy card for 50 times what I'm able to generate an income off that a year through a leveraged 10 to 1 position? I mean, I'm not. I'm not going to do it. Now, it happens that that sort of scenario applies to property today, and there's the criticism, right? And too many times I speak to people and just sort of seems this religious cult at this point. It's just like these things are said as fact when every little bit of evidence from history and reason suggests that that is not true.

1:13:09And so what I was going to say is it's the same. There are regularly times on the share market where the same can be true, right? We were just talking about retailers before, you know, wow, 30 % growth from last year and this and that. and it's like that's great but don't expect don't mathematically don't expect that to happen every year because if you extrapolate that forward long enough you know it becomes bigger than the gdp of planet earth like it just it just cannot do it same thing 1999 people got excited about well even i mean even some of the frankly tech shares in the last 18 24 months yeah they go up because they go up because they go up because they go up because they go up until they don't you believe you start to believe that the rationale might must be true you try and here's the other It doesn't mean you hate shares, by the way, when that happens, right?

1:13:55Big fan of shares, but it's bringing those expectations back and understanding what represents fundamental value versus what is just a speculation on this will always happen because, look, it happened recently. And I think the other thing, what I think about the dot-com crash and then take it to the last 24 months in tech shares and then take it to property and any other asset class is the temptation for humans. You know I love my behavioral psychology. The temptation for humans to convince themselves that there must be a pattern. The pattern must be observable. And once you observed the template, therefore you must be able to, on an ongoing basis, assume that will always be true.

1:14:29So the best example on the tech space is paying 20 times sales, right? Because everyone pays 20 times sales. Therefore, if a company sells at 15 times sales, it's actually cheap because the rest of them are 20 times sales. And once you start to do stuff like that, and your point about property is the same thing. It's gone up at double every 70 years for the last 45 years. Well, okay, that must be because that's just what it does because, you know, therefore I should expect this yield. Therefore, if the yield is less than that, it should be more coming because it must be, you know, it's going to catch up to that rate of growth at some point.

1:14:58So look at which I'm going to be when it does. It's the same thing of saying I can pay 15 times sales or a P of 1 ,084 because everybody else is. So as long as it's relatively, you know, attractive, therefore it must be attractive. It's again, the emperor's not wearing any clothes problem of actually it turns out 20 times sales was never reasonable for any company. so comparing your very very very overvalued business against some extremely overvalued business is just yeah it's it's an exercise in futility yeah the same is true if you look at for example and we think that's true of house price over the last 40 odd years you say well if you literally mathematically work it out work backwards and say here's how we got to this point what are the things that happened how do those things continue well they can't can they continue okay yeah well let's see so if they can't then the logical thing is therefore the rate of growth must be different in the future because there'll be different inputs yeah there will okay now we're having a real conversation yep that breach 100 amen that that is that is exactly it in a nutshell and it comes back full circle to the idea of how do you fix this you know is it in interest rates it plays a part sure but it's the other it's the other aspects of that not to be draconian not to be command economy just to ensure stability so it's this conversation the reason we so unintentionally It really is, listeners, unintentionally always come back to properties because you can't have the conversation without that because it's not just in isolation looking at it as an asset class and comparing it against fundamentals and what be reasonable, which is all true in all a very valid conversation.

1:16:29But it's far, far more significant in the sense that it impacts everything because we are all tied to this asset class. So where we have painted ourselves into a corner And the way the Ponzi is so precarious now is that if, because we have put all of our wealth into it and borrowed up to the eyeballs to do it, incredibly lucky that this massive growing economy demands, you know, 34 % of our exports are rocks that go to China, right? Like, thank you. That was really nice. That came along. What do we do with that? Let's all bid up property. And it's now systemically important. So when you start talking, as we have, about inflation and interest, you land logically back on property.

1:17:13Now, different periods of time, it was tulips. Other periods of time, it was shares in the South Sea Company. It just happens that it's property right now. And you find me a random person on the street, even if they don't own any property, it's like they're impacted by it because they're renting, right? Which means that they're impacted. whether you're talking about a retail it comes back to property because the reason people aren't spending on retail is because they're servicing a higher mortgage or a higher rent the reason that we're talking about any xyz it just comes back to property because that's the structure of the system it's sort of like the thing that underpins so much of it and wealth is uh you know it's a subjective kind of term but it impacts our confidence it impacts our propensity to spend it It impacts our capacity to spend.

1:18:00And so it's just so much bigger a conversation than just the property and the yield and this and that and the rest of it, which is why it's very hard to get away from. And I just make the point that without trying to make any predictions, because who knows what can happen? Because cans can always be kicked down the road and good things can always happen unexpectedly. But I really think we are walking through the tinder dry forest smoking cigarettes. You know, it's not a guarantee outcome for a recipe for disaster, but it's not exactly the safest thing to do. Yeah, although... We should have done some backburning maybe along the way.

1:18:41Well, that metaphor, though, does suggest that... I mean, that's a pretty dire one. It is. That is an inevitable inferno. Not inevitable, but just a risky scenario. But Tinder, drive fire, smoke cigarettes. I'm only, the only reason I raise it is because it's worth talking about how likely you think that range of scenarios are. You know, if you walked far enough and long enough through a tinder off-fire smoking cigarettes, eventually you would start a bushfire. It's almost inevitable. Is that the approach? Is that the view you have of the situation? Or is it just one way of illustrating the sorts of risks we might be taking?

1:19:16I think it's very, so many people make this mistake. They sort of observe, again, no forecast. This is where we are. Very dry, cigarettes burning brightly, ashing all over the place. That's just sort of where we are. So it's not a question of therefore this and therefore by this much and therefore by this date. And so I'm not silly enough to do that. But I just think logically, to your point, the longer I do that, the greater my chances are of something happening. So it's not a – I've always said investing is a probabilistic game and there's always a range of outcomes. You can't predict the future, but you can sort of make educated guesses at various scenarios.

1:19:57And I just get to the point now where we are, where it's sort of like, well, everything is fine. We avoid a recession. Interest rates don't go up too much more. I mean, all these big structural factors have, you know, they've done whatever they're able to do. So maybe we get 3 % or 4 % compound growth in property going forward. Okay, that's cool. A scenario A, you know, maybe it's 5%. I doubt it, but maybe it's that over a long enough sort of timeframe. Now, let's contrast that with what could happen if the cigarette does sort of touch a dry leaf or something like that. It could be 20%, 25 % down.

1:20:33It needs to be kind of that if you want to improve affordability to some extent. New Zealand's just gone down 20%, right? Go back not that long ago in the US and Ireland and Spain and Portugal and, you know, et cetera, et cetera, et cetera. These are scenarios that aren't inevitable. And that's the mistake I think people make. And I hope I don't make that. But I just, and so I'm not ringing, I'm not crying chicken little. It's all about to end. I'm just saying, put the cigarette out. Can we maybe water some of this land here a little bit? It is by definition a risky proposition. and if all we do whenever we face this same conundrum is is do more of the same in the past which has only made it worse we're just making the forest dryer and the cigarette burn brighter and and so it's i know it's a subtle hopefully it's a subtle point but people get get the difference here not this will happen but it is more likely to happen and and and given the ramifications more broad for anything that's just well beyond prop just the our prosperity as a nation.

1:21:42It just, it concerns me. It does. I think that's very, very fair, mate. I think it's very fair. Hey, we're probably out of time. Will you join me on Sunday for a Malvo? You know I will. I will hope there are no property or Bitcoin. I've got to say. No promises, but yeah. Until next Sunday, in two days' time, full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

1:22:19The Motley Fool operates under Financial Services Licence 400691.