WHERE HAS THE MONEY GONE?
Productivity has grown enormously since I started work. In addition, participation of women in the workforce has also risen dramatically. In theory, these changes should have resulted in families being much better off financially assuming a reasonable share of the benefits of both these changes were shared with families.
Problem is that too many families with both parents working claim to be struggling financially as well as being stressed by the pressures associated from having both parents working long hours. Which begs the question: What has happened to all the extra money generated by the increases in productivity and working hours per family?
This post asks “where has all the money gone?” with particular reference to affordable accommodation.
Over the 33 yr period productivity rose by a total of about 60% while wages only grew by 25%. In the 5 yrs since 2013 wages were stagnant while productivity grew by about 8%. Keep in mind that the wages of senior management grew faster than average wages.
The potential benefits of increased productivity and working hours include:
- Improved real wages.
- Reduced working hours.
- Lower prices.
- Increased competitiveness
- Increased production/sales.
- Increased profits, some of which may be reinvested, and some that will go to dividends.
- Business able to increase profits by laying off some unlucky employees.
- Improved results for businesses and people who sell directly or indirectly to the workers or others whose purchasing power increases as the result of income rises.
- Improved result for banks and other businesses that directly supply goods and services to business.
- Improved results for banks and other businesses that indirectly supply the business. (Ex: Overseas banks that lend to the bank that lends money to the business, etc.)
- Improved results for businesses who sell goods and services to employees, shareholders etc. whose income has increased
It is worth asking: How are all these benefits shared? (There is no guarantee that working families will gain much after all the other beneficiaries have got their bit.)
Families that claim to be struggling may feel this way because of the inflated expectations helped along by things like an advertising industry that works at creating “needs,” general competition for status etc.. However, again and again it is the rising cost of accommodation in real terms that is blamed for their feeling of struggling and dissatisfaction.
Australians have traditionally aspired to home ownership. Problem is that home ownership is continuing to fall as the great Australian dream gets more distant for many:
Home ownership has fallen from 70 per cent of households in 1998 to 66 per cent last year, according to detailed analysis from the Australian Bureau of Statistics. It is the lowest proportion of home ownership in Australia since the ABS started the data series in 1994.
However, while home ownership is on the slide, the proportion of households still in debt has risen sharply. Two decades ago, 40 per cent of households had paid off their mortgage. Last year that figure had fallen to 30 per cent.
Those renting, as a proportion of all households, rose from 27 per cent to 32 per cent over the period of the study, while the proportion of public housing tenants halved from 6 per cent to 3 per cent of the population.
The ABS study also found the average weekly housing costs for all Australian households was $311 per week. However, it varies significantly for different tenure types:
$53 for owners without a mortgage
$484 for owners with a mortgage
$366 for renters. (Keep in mind that average renters would be living in lower valued accommodation compared to average home owners. Also keep in mind that, for people who move around, renting may be more practical than buying a new home every time they move.)
Some people might want to claim that accommodation costs more now because people want more elaborate homes. This may be true to some extent but the Davidson experience doesn’t support this. (We had two properties we owned for 26 and 33 yrs without doing any upgrades. The compound rate of return for the capital gain of these properties ranged from 8.7 to 10%, well above the inflation rate and well above wages growth.
Buying a home has really become more expensive. The 33 yr house cost us about 2 yrs worth of senior engineers annual income at purchase time. It was sold for about 6 years worth of senior engineers annual salary at the time of sale. So what has gone on?
When my wife and I built the 26 yr house in the sixties the cost of land + building was about twice my annual income as a junior engineer. The cost of the land it was built on was only 14% of the total cost. The cost was low because the banks were reluctant to loan more than what they thought the family could afford.
For example, my recollection is that the Commonwealth Bank would lend no more than the amount that could be paid back by 25% of the male partners income. (Women get pregnant don’t you know!) This may seem outrageous by modern standards but my take is that this loan restriction kept the price of houses under control. There is not much point to building and trying to sell houses that people cannot get a loan for.
It seems reasonable to assume that the actual cost of building the equivalent of the houses we purchased would be lower now because of increases in productivity. This suggests that it is the price of land, not the price of houses that is making houses less affordable. (The people who bought our 33 yr house pulled it down and built another one. The increase in the real dollar price was all about land value.)
The above reasoning suggests that some of the actions that governments take in response to the housing affordability problem actually drive prices up because they increase the price that buyers can afford to pay. (Think grants to new home buyers.)
In addition to “able to pay” there is the issue of “willing to pay”. (Some people choose to buy houses for less than they are able to pay because they believe they have better things to do with their money or want to be less exposed to risks associated to changes in their circumstances.) Our economy may perform a lot better if people were spending less buying houses and more on other goods and services.
Some government concessions also encourages people to increase what they are willing to pay. For example, capital gains tax does not have to be paid when the “family home” is sold. Makes buying a more expensive family home a more attractive capital gain investment. Actions that push up “willing to pay” have a similar effect on house prices as actions that push up able to pay.
Some government policies help to drive up rents by not treating rental properties the same as owner occupied properties. There is this touching idea that charging rental properties more won’t be passed on to renters.
So where does the extra money from house sales go? Alternatives include:
- Banks make more money because they lend more money.
- Foreign banks make more money because Australian banks get some of the money they lend overseas.
- Australian and foreign bank shareholders make more money. Not all of this will be spent in Australia.
- Money from sales will go to state governments, real state agents the sellers of the house etc. Not all of this money will be spent in Australia.
- Renters and house buyers may have more money to spend on things that improve their lives.
In theory, housing affordability could be improved by fixing some of the problems identified above. However, these fixes are politically fraught given that about 70% of accommodation is owner occupied and some renters will also be home owners at the same time.
It may be politically easier to attack the problem by doing things that increase the supply of low cost accommodation without reducing home owners wealth. Possibilities include:
- Increasing the supply of public housing.
- Removing local government rules and developer covenants that discourage low cost housing, smaller housing blocks.
- Mandating the minimum amount of low coast accommodation in council areas.
- Allowing houses and land to be divided into a number of separate units to suit changing family size and market demand..
- Insisting new houses be designed so they are easy to divide up later when family size has reduced.
Housing is not the only situation where well meaning ideas by governments and others fritters away the expected benefits of of increased productivity and working wives. For example, one of the outcomes of introducing compulsory superannuation was a boost to share prices because supper companies need good short term results to compete for new customers. Investing in Australian infrastructure might make it harder to compete in the short term.
What other areas are frittering away the benefits of longer family working hours and increased productivity?