The apparent stupidity of Residential Real Estate pricing in Australia is not as stupid as it first appears. Now is Joe Bloogs entirely wrong in stretching his limits to buy the biggest most expensive house he can. There are three relevant which have brought about the current house of cards 1. Negative real interest rates over many years...decades. For a start let's forget the fidsdled statistics that are being published and return to the old ways of calculating inflation. Let's assume that REAL inflation is currrently about 7%. Interest rates (particularly after tax) have been negative in this country for decades. So it NEVER NEVER pays to save! In additon, the Bankls favour lending to residential real estate with lower interst rates than small business to the tune of about 2% (in general). 2. Banks allow such high gearing on housing, in part because "real estate always goes up" You can easily borrow 90% of a house. Try that with your average small business!!!!! 3. Government tax policy is so outrageously skewed to housing. It is the only Investment you can make that you do not pay Capital Gains tax. In a business you not only pay tax on your real income but you also pay tax on the inflation!!!!
A quick IRR shows that given the average marginal tax rates, the favourable tax treatment, and the level of gearing possible on residential property, one has to earn about a 26% return on other investments to match the return on housing if one asssumes a 3% real increase in house prices.
As a resulkt of all this, investment is so badly misallocated in this country that we have created a national debt that we can never repay and will simply have to keep selling off our national resources and food chain at an ever increasing rate.
