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      The latest crackpot scheme for helping people to buy ridiculously overvalued property is the U.K.’s help-to-buy scheme. The first version of this scheme was effectively a subsidy to house builders, since it guaranteed part of the mortgage on new build houses only. Not surprisingly, house builders loved it and almost everyone else hated it. It was panned by the Chancellor’s own department, and the IMF and the Organisation for Economic Co-operation and Development (OECD) both expressed concern about its possible effect on an already overblown housing market. So of course the Government is now extending it — to buyers of existing houses and remortgages.[9]

      In September 2014 the U.K. government added a 20 percent discount on home purchases for first-time buyers to the scheme.

      Mark Carney, former head of the Bank of Canada and now governor of the Bank of England, brought with him Canada’s penchant for using housing as a stimulus for the economy while risking an unsustainable bubble in the process. Of course, the housing bubble in England is observed mostly in London and is driven by the city’s elite status as the world’s leading financial industry centre.

      But what about a country very similar to Canada, where every major city has house prices that are unaffordable?

      The Bubble Down Under

      In January 2000, according to the Reserve Bank of Australia (RBA), bank lending to persons for housing as owner-occupiers was A$165 billion. In September 2013, bank lending to the same category reached a total of A$800 billion, an increase of five times. This runaway growth in debt leverage makes Canadian speculators look timid. To accomplish this mind-boggling increase in debt there are four banks, all ranked in the top twenty in size in the world, which is odd for a country of just twenty-three million. According to Lindsay David, author of Australia: Boom to Bust, “the banks have ‘bet the bank’ on Australian real estate and natural resources.”[10]

      We saw in Figure 1.2 that the Australian house-price-to-income ratio is more than 35 percent above the long-term trend line, an overpriced housing market that is very near to Canada’s ratio. Recall from Figure 1.1 that Australia and Canada stood out as two markets with the most rapid house price increases in last forty years.

      Incomes failed to keep pace with house prices in Australia, meaning that Australians devote an ever-larger portion of their disposable income to housing. Obviously, they must enjoy their houses a lot or, similar to Canadians, they believe that prices will keep rising indefinitely and they don’t want to miss out on speculative gains. Certainly it wouldn’t be a shortage of land causing the price increases, since, like Canada, Australia is one of the least densely populated countries in the world. In fact it’s a great irony that three of the most sparsely populated countries in the world — Norway, Australia, and Canada — have such expensive housing.

      In September 2014, the RBA reported that “the composition of housing and mortgage markets is becoming unbalanced. This has been evident in the current strength of investor activity in the housing market … the apparent increase in the use of interest-only loans … might also be consistent with increasingly speculative motives behind current housing demand.”[11]

      Australia’s central bank, like the Bank of Canada, issues warnings but there is little they can do to restrain speculation short of jacking up interest rates. Australia enjoyed a decade-long surge in incomes due to favourable terms of trade as an exporter of commodities such as iron ore. Even more than Canada, Australia is dependent on one country as the buyer for its exports. In their case China consumes most of their commodity exports. In both countries future income will depend on commodity prices although the mix is different. In Canada crude oil and bitumen are most important; in Australia base metals such as iron ore and coal will provide income growth. In 2015 weakness in China’s economic growth, collapsing iron ore prices, and especially the important steel-making sector cast doubt on the short-term future of Australia’s commodity exports.

      China’s housing bubble operates in a world of its own. According to a paper by Kaiji Chen and Yi Wen, of the Federal Reserve Bank of St. Louis, China’s average real house prices “have grown at an annual rate of 17 percent for the past decade, far exceeding the 10 percent average growth of real GDP … associated with … housing boom is the growing number of empty or ‘ghost’ apartments across major cities in China.”[12] That pace of growth implies that prices are doubling in less than five years. While many have written about China’s ghost cities and apartments referring to investors’ penchant for buying units and leaving them empty, the real estate boom in China defies all predictions of eventual collapse. As discussed in chapter 14, the inevitable slowdown or collapse of China’s housing construction industry will impact Australia and Canada through the drop in demand for the building materials that go into housing, especially copper, steel, nickel, coal, and iron ore.

      There are a few house-price bubbles in the world, like Canada’s, that continue to grow more stretched and Canada ranks right up there with the best, probably tied with Australia in first or second place for the most advanced bubble. How did much of the planet come to a point where so many people became obsessed with home ownership and real estate speculation?

      Chapter 4

      The Investment Myth

      “owner-occupied housing is looking like a bad long-term investment relative to the stock market: despite the occasional volatility of real estate, it has offered practically no capital gains for long-term investors”

      — Robert Shiller, Irrational Exuberance[1]

      Home ownership is unique in that it is often considered both a useful necessity and an investment. A home can be merely a place to live; it can be valued as an investment or it can be both. The investment value, if there is any, depends on the speculative component of ownership. The speculative component refers to potential for house prices to rise with time at a rate greater than inflation, generating a real profit for the owner if the property is sold.

      The primary purpose of homeownership is the provision of shelter — a place to live — which is a good substitute for paying rent. Willem Buiter, in his National Bureau of Economics Research (NBER) paper “Housing Wealth Isn’t Wealth,” states that the true value of housing is the “present discounted value of its current and future rentals.”[2] In other words, the financial benefit of homeownership is the money saved by prepaying the cost of home rental for the remainder of one’s life.

      The true economic value of home ownership consists of the sum of rent payments that are avoided plus (or minus) the gain (or loss) on the speculative component.

      Buiter explains that those who are long housing, i.e., those who own more value in housing than the cost of renting, are temporarily better off during a bubble. But he argues that they have not created wealth by owning more real estate than they need. Those people are also the ones who are hurt by a bursting of the bubble, as they lose more than those who are short housing, i.e., those who either haven’t bought yet, are renting, or living in inexpensive housing.

      Indeed, any young person who has not yet bought a house, or has bought a modest home but is occupying housing space that is smaller and/or less costly compared to their eventual permanent

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