Renovation Nation — Redefining Prosperity – Fiona Allon

Issue 2 | 13 May 2009

On Wednesday 13 May 2009, Fiona Allon spoke to The Sydney Institute. Dr Fiona Allon is a lecturer at the University of Sydney and a recipient of an Australian Postdoctoral Fellowship for the ARC Linkage grant. Her latest book Renovation Nation: Our Obsession with Home (UNSW Press) asks why it is that Australians have become so wrapped up in their homes and explores the ways people distort their lives in the pursuit of prestige and tax-free capital gains.

RENOVATION NATION – REDEFINING PROSPERITY

FIONA ALLON

My book Renovation Nation: Our Obsession with Home came out late in 2008. The book deals extensively with themes of real estate, real estate speculation, home ownership and mortgages, including the sub prime mortgage market, so its appearance in the middle of what was initially called the sub prime crisis was exceptionally good timing. The sub prime crisis – do we even remember now that that’s how the global financial crisis actually started?

The satisfaction of timeliness soon turned into anxiety about the book being washed away by the financial tsunami that began to dominate every inch of newspaper coverage and every moment of public debate, a tsunami that included a flood of revised and reissued popular books about economics. After all, a crisis is also a great publishing opportunity – all you really need is a new introduction.

However, I’d also like to think that there was some degree of prescience involved in the timing of my book. After all, for some years now homeowners have been asking more and more of their homes. They’ve been asking them to be tickets to quick and easy riches; assets, investments and stores of equity; sources of income; de facto ATM machines for supplying cheap lines of credit for consumption, and especially for the most popular pastime of Home Equity Withdrawal – home renovations.

Homeowners have also been banking on their homes in other ways too, seeing their housing wealth as a substitute for pensions, superannuation and retirement schemes and forms of social welfare in general. As last month’s Economist put it, consumers have become “obsessed with the idea of a house as their main store of wealth, regarding it as a combination of cash cow and pension plan” (Economist, 2009, 71).

In effect, housing wealth has increasingly become seen as the key to, and guarantee for, all other kinds of wealth, prosperity and financial security more widely. What we’ve been doing, in other words, is betting the whole house on precisely that, our house.

The worldwide rise in house prices over the past decade and a half has been called the biggest housing bubble in history. Homeowners marvelled as the value of their homes spiralled upwards. This so-called “new era” of prosperity represented by the increased availability of credit, low interest rates, low inflation, and rising asset values brought wealth and affluence to large numbers of ordinary suburban families and households. Both the economy and the property market seemed as if they would continue to boom indefinitely, and some even declared the usual inevitable bust would not be repeated and was merely a historical curiosity, a flaw of the past.

The mortgage and housing markets were central to the “wealth effects” produced by increased prosperity. One of the major consequences of this large upswing in the residential real estate market was “the general expectation that ordinary households should be able to derive significant income from profitable investment (or speculation)” (Quiggin, 2008, 3).

The meanings of home ownership also fundamentally changed during the period of the boom. A house was no longer primarily a means of shelter or simply a roof over one’s head; rather it became a vehicle for investment, capital gains, and further wealth accumulation. One of the results of this redefinition was that home prices speculation became “more entrenched on both national and international scales than ever before” (Shiller, 2005, 12).

In the conclusion to my book, I wrote that: “The US housing crisis, triggered by widespread defaulting in the sub prime mortgage market, has become a global event in all kinds of ways. Its repercussions have already been felt, and no one knows the scale of the damage yet to come to international financial markets” (Allon, 2008, 209). Well, we’re still not entirely sure, but we have a fair enough idea. It’s been claimed that an estimated 10-12 million US households will not be able to pay their mortgages over the next four years. One article, by globalisation scholar Saskia Sassen, recently claimed that there are an average of 10,000 mortgage foreclosures every day. (Sassen, 2009). There are also around 10 million households with negative home equity – that is, the amount that is owed on the mortgage is more than the value of their houses.

In Australia, housing stress is now a major concern for all kinds of households. This includes low-income renters unable to find affordable housing as well as families in mortgage stress, struggling to make loan repayments. Some Australian homeowners are also finding it very hard to sell their houses because they’re now worth so much less than when they first bought. They’re very much stuck between a brick and hard place. The western Sydney seat of Blaxland – Paul Keating’s former seat- is now referred to as the Mortgage Stress Capital of Australia. The current Federal Member for Blaxland, Jason Clare, has reported that there are approximately three house repossessions each day in the area, and that levels of financial stress are severe (Bourke, 2008).

In 2008, US Treasury Secretary Henry Paulson called the bursting housing bubble “the most significant risk to our economy”. And later that year the global markets did something that Alan Greenspan subsequently called “a once in a half century, probably once in a century event”: they froze. The sub prime crisis morphed into a liquidity crisis then a credit crunch and then quickly become a global financial crisis. And now, as we all know, we’re facing what has been called a global recession, the “great recession”, as it’s been called.

In the fallout from the global downturn there has been much hand wringing and soul searching to find out and understand the causes of the crisis. And in this unfolding global drama there is certainly no shortage of villains to name, blame and shame. Greedy investment bankers and even the sin of greed itself; traders and their financial weapons of mass destruction; unscrupulous, predatory mortgage brokers; overpaid captains of industry, and even the captain of the American financial system and Federal Reserve himself, Alan Greenspan, have all been singled out for criticism, and have even been named as the culprits who “caused” the crisis.

In April 2009, the Sydney Morning Herald journalist Peter Hartcher gave an address at The Sydney Institute in which he levelled the blame for the crisis fairly and squarely at Greenspan and the loose monetary policy that he presided over during his watch. There is certainly a great deal of comfort and reassurance to be gained from isolating a single individual or entity as the “cause” or culprit of the crisis. In a way, it’s similar to believing that our fate is always in the hands of the gods – the complexity of life suddenly becomes a lot simpler and responsibility has a single source and is easily explained.

As Hartcher outlined it in his talk, we should more or less discount the global savings glut, China’s new role as an exporter of capital to the world, the popularity of new financial products such as exotic derivatives, financial deregulation, house price inflation and so on, and realise that one man and one man only was really responsible for the current crisis: Alan Greenspan. While Hartcher at least mentions these wider processes as other possible contributing factors, chief among his targets is Greenspan himself. Now, I’m a university lecturer in Gender Studies and as I tell my students every week, putting the blame fairly and squarely on one man’s shoulders may be easy, it may be reassuring, and it may even be partly true, but it’s rarely ever that simple.

After listening to Peter Hartcher on that evening a few weeks ago (and please don’t get me wrong, I think Hartcher is a fine and insightful journalist), I asked myself: what does this analysis, this explanation, offer us more broadly as we assess the damage caused by the downturn not just to our financial system but to our society more broadly? How does blaming Alan Greenspan help us look beyond the more obvious economic issues that are at stake here so that we can also view the social, political and cultural forces that came into play, forces which also undoubtedly contributed to the mess we’re in?

So, in contrast to Hartcher’s explanation, the kind of analysis I’m interested in here leads me into the complex and difficult terrain of social attitudes, values, behaviour, expectations and everyday practices that we usually call a culture. In contrast to focusing on a single individual like Greenspan or a single figure like a predatory mortgage broker, or a single entity such as “extreme capitalism”, focusing on a culture means looking at something that is quite diffuse, dispersed, multiple and complex, and that involves everyone – central banks, economists, institutions, the media, politicians – and includes ordinary individuals, like all of us.

A culture also includes what John Maynard Keynes called “animal spirits”: those “spontaneous urges” and feelings, spontaneous action rather than inaction, those psychological and emotional states of human behaviour that create feelings of trust, confidence, optimism, fear, pessimism and bad faith (and we have to just look at the current credit crisis to see these spirits very literally, and very concretely, crippling the financial system).

It also includes what the economist Robert Shiller calls “new era” stories that suggest that the good times of the new era will continue forever, and the great myths of real estate: “there’s nothing as safe as houses”, that bricks and mortar are the best bet, that house prices never fall. Because it’s so intangible, so widespread and, in a sense, so natural, a culture is extremely difficult to analyse and talk about. But I think that is what we have to do to gain a deeper, more comprehensive, understanding of what caused the boom, the bust, and the predicament we’re now in. It is also what we have to do in order to take up Reserve Bank Governor Glenn Stevens’ challenge to redefine prosperity so that it’s not just seen as something achieved by ever-escalating mineral prices or simply by bidding up the prices of our houses (Stevens, 2009).

In 1992, James Carville, Bill Clinton’s campaign adviser during the election campaign that saw Clinton defeat George Bush senior, coined the phrase “It’s the economy, stupid.” In a globalised and interconnected world, economies, nations and households are as open and vulnerable to worldwide economic fluctuations and changes as never before. When it comes to global finance, it is a quite literal interconnection, as the sub prime crisis quite painfully demonstrated. Nowadays, the risks of nearly everything are spread far and wide, and we share them whether we like it or not. But what I’d like to suggest here is that alongside the primacy and prominence of the economy in our lives now, it’s important to recognise that “It’s also the culture, stupid!”

This is certainly not to suggest that understanding what’s happening at the level of economics isn’t important. It’s just that economics and the economy don’t take place in a vacuum. As Joseph Stiglitz recently remarked: “There’s a reason the invisible hand of the market is invisible: it doesn’t exist.” Economic behaviour needs therefore, I believe, to be understood within the overall context of the social and cultural order in which all human practice is immersed and embedded.

But let me be clear: I’m not letting Alan Greenspan and monetary policy off the hook here. There is undoubtedly a real need to question our reliance on it as the main lever of control for establishing some ideal economic equilibrium. Now is an opportune moment to reflect upon the ascendency of, and indeed the obsession with, monetarism. Over the last few decades it became an article of faith that we could, indeed we should, rely on central banks to control economies through finely tuned monetary policy.

During this time, governments and central banks single-mindedly battled to make sure that the genie of inflation stayed securely in its bottle. They also single-mindedly applied themselves to reducing government debt at whatever cost, while allowing levels of personal debt to reach unprecedented and unsustainable levels. Now I don’t want to sound too much like Steve Keen but we do need to acknowledge that levels of household debt in Australia reached levels even higher than in the United States. But in a sense this conversation is too little, too late: our almost complete reliance on monetary policy is now something that we’re being forced rather than choosing to assess.

Yet despite the prominence of monetarism over the last decades I really don’t believe it’s very credible or particularly insightful to blame all the excesses of recent years on loose monetary policy. While cheap credit may certainly have had the effect of boosting the global asset price boom, it was not in itself an exogenous factor that caused the housing bubble and its inevitable bust. In our rush to find explanations for the crisis, there has been a tendency, I think, to confuse and conflate factors that were themselves products of the bubble, and to see them simply as causes.

In fact, both in the United States and here in Australia, there was a dogged determination to keep buying houses irrespective of what interest rates were doing. As Shiller has explained in relation to the US context, “the interest rate cuts cannot explain the general nine-year upward trend that we have seen in the housing market. The housing boom period was three times as long as the period of low interest rates, and the housing boom was accelerating when the Fed was increasing rates in 1999” (Shiller, 2009, 49).

The conclusion that we can draw from this is that “monetary policy appears to have been driven at least in part by the same lack of understanding that produced the bubble itself” (Shiller, 2009, 49). In other words, the Fed and central banks around the world and the mortgage lenders and the investors in the mortgages that were bundled together as residential mortgage-backed securities and collateralised debt obligations all saw home-price increases as continuing. And these individuals and institutions were in a sense no different to the borrowers (both prime and sub prime) who were obsessed by the idea of somehow gaining a foothold in a rising housing market.

By not taking into account the wider culture in which excessive borrowing and excessive debt is situated – the behavioural explanations of why people want houses – even central banks reach their limits of usefulness, being able to address the situation only by using a very blunt, clumsy instrument: interest rates.

Our preoccupation with real estate, with home ownership, and with consuming more and more housing, ultimately transcends “rational” explanations associated with economics and economic theory. What this means is that the motivations for our behaviour, especially the amount of debt we are prepared to take on to get a foot in the door of the housing market, are not explainable simply by economic and financial variables. Our obsession with home and housing, and the effects it directly creates – like over-investment in property, uninformed and just plain stupid speculation, debt-ridden home buyers amid escalating levels of risk, vulnerable mortgagors, housing stress and widespread housing unaffordability – sits within a much broader landscape driven by social attitudes and values, politics, perceptions of unbounded economic prosperity, and national histories and traditions. In other words, it’s about culture. It’s the culture, stupid!

While it’s not possible to discount the roles played by cheap credit and the guiding principle of the real estate market (location, location, location), the culture is the glue that binds these things together. It’s the culture that produces the property investment seminar, the real estate-dominated dinner party conversation, the housing affordability barbecue-stopper. It’s the culture that makes society, as a collective, forgo rationality and economic prudence and common sense, and in a moment of classic irrational exuberance bid up house prices to a level its children will never be able to afford. This is the specific culture (the patterns and ways of thinking and feeling and behaving) driving the boom in housing.

And in a sense, that’s exactly what happened. When the housing boom really took off, Australia’s long-standing obsession with home ownership was unleashed on a scale never previously seen. Many people were prepared to do anything to get a toehold on the property ladder. This included taking on truck loads of debt and dodgy low doc, or even no doc, loans. It’s no surprise that supply couldn’t keep up with demand.

A culture of borrowing became the norm. The household debt to income ratio confirmed this rising from 56 per cent in the 1990s to more than 160 per cent in 2007. In other words, the typical household at this time spent far more than it actually earned. The Reserve Bank said there was no “domestic precedent” for this state of affairs. And as Deputy Governor Ric Battelino reported, it was housing-related debt in particular that had increased so significantly, and our obsession with consuming more housing which had been most responsible for the excessive debt held by the household sector. In the ten years between 1997 and 2007, for example, households borrowed $770 billion. Of this, 90 per cent went on buying houses. To be even more precise, $420 billion was used to buy houses to live in and $240 billion was used to buy investment properties.

The exuberance that Australians showed in buying houses and investment properties (and in 2003 it’s worth pointing out, loans for investment housing were the fastest growing category of household borrowing) was also matched by an exuberance for dipping into their housing equity. In the decade up to 2007 there was an astonishing amount of households steadily withdrawing their equity, whereas in previous years they’d steadily built it up. Indeed, during this decade, the growth in housing credit exceeded the value of new housing being built. In other words, we took more out of housing equity than we actually injected into it – something that had never occurred before. It was becoming worryingly obvious that, housing equity is increasingly regarded as the “solution to all future financial needs”.

Where did all this withdrawn equity go, you may be asking? Well, house prices were not the only things that had grown to spectacular proportions; so had the houses themselves. During the boom, the Australian Dream got completely rescaled. It began to look like it was on steroids. Even though household sizes have been getting smaller, the four bedroom house became the most desired kind of dwelling. The floor space of new houses has also increased by around 40 per cent over the last 25 years. And if we weren’t personally involved in some real estate transaction or major home improvement undertaking, we were bound to be watching one on television.

As Paul Krugman has outlined in his work, this climate of excessive optimism about a new era of “unprecedented” global prosperity stemmed in part from a sense by the late 1990s that the central problem of the business cycle, of boom followed by bust, if it had not been entirely eliminated, it had at least been decisively tamed, perhaps had even been solved (Krugman, 2009).

When one believes the future looks just like the present and that prosperity will go on forever, the arrogant assumption is also that the unpredictability of economic life has been conquered, overcome and left behind. And not so long ago there was no shortage of experts telling us that this was the case. And why would we want to doubt the economic models that showed that the good times would continue to roll forever?

Examples from both the Australian and American contexts clearly illustrate that the very people who should have been responsible for oversight and caution, and for recommending greater regulation and restraint, were as convinced as the general public by the prospect of limitless growth and prosperity, and had exactly the same expectations of future home-price increases. And I think one of the reasons the global financial crisis seems so spectacular is simply because very few people saw it coming.

Most of our authorities never even used the term housing bubble. In fact, most of our authorities – the ones now calling for heroic New Deal style measures, for a new Bretton Woods, and who denounce fear and greed at every turn, not only denied that there was a problem with house prices rising so dramatically, but actually did all they could to keep the boom thundering along. For example, Alan Greenspan in his 2007 book The Age of Turbulence recalled the housing boom in these terms: “I would tell audiences that we were facing not a bubble but a froth – lots of small local bubbles that never grew to a scale that could threaten the health of the overall economy.”

George W Bush introduced a series of measures – including his “Homeownership Challenge” – to make home ownership accessible to increasing numbers of Americans, especially minority groups. And he used the same language of patriotism and persuasion as his counterparts here: “Owning a home lies at the heart of the American dream,” Bush declared again and again.

When he was Prime Minister, John Howard also repeatedly emphasised his commitment to both home ownership and to high house prices. Howard said he was “committed to Australia remaining a great home-owning society, indeed one of the greatest in the world, where the dream of home ownership remains at the heart of the Australian experience and within reach of each successive generation”.

For Howard, the housing boom that was driving up house prices and actually making home ownership more unaffordable for successive generations was not a problem. As he explained in parliamentary question time in 2007, “A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices.” And as he said to a radio caller in Brisbane in 2003: “I haven’t had anybody shake their fist at me and say: ‘Howard, I’m angry with you for letting the value of my house increase.'”

Kevin Rudd has demonstrated a remarkably similar attitude to maintaining house price inflation. Despite it being generally understood that giving people more money to spend on housing only leads to more expensive housing, the Rudd government boosted the First Home Owners Grant threefold. Rudd himself has been urging young people to take on home ownership, even if that means that first homebuyers are entering into an inflated, distorted false economy created by the grant itself.

In today’s uncertain and precarious climate of rising unemployment and falling house values, urging people to take on large mortgages is perhaps not the most responsible advice the government should be providing. As one newspaper headline put it: it’s becoming “the first homeowner’s time bomb”. Essentially, this grant will simply increase demand, put more upward pressure on prices, and therefore do little to improve long-term affordability, and perhaps will make it even worse. The Rudd government policies, therefore, seem to be more concerned with supporting and perpetuating real estate myths, and preventing a collapse in house prices at whatever cost.

Yet the Reserve Bank has said time and again, “one can make the case that the population in aggregate does not benefit from increases in house prices” (Richards, 2008). What’s both surprising and disturbing then is that despite the prosperity, the credit revolution and the democratisation of finance, the home ownership rate has not increased; some say it may have even dropped. The benefits of low interest rates were largely nullified by house price inflation, simply capitalised into soaring house prices rather than leading to a wider and fairer spread of owner occupation. As the Deputy Governor Ric Battelino has said: “In Australia, the lending boom was concentrated on existing home owners who traded up to bigger and better houses and bought investment properties” (Battelino, 2008).

Alan Greenspan used the term “irrational exuberance” to describe these kinds of episodes of collective speculative fever or mania. But in a way homebuyers were simply being exuberantly very rational. The logic of financialisation that has permeated our culture over the last few decades led to a widespread belief that if you weren’t investing or speculating in the real estate market basically you were a mug.

The language of market populism became so pervasive, and financialisation became seen as such an unstoppable natural force, there really did seem to be little alternative to jumping on board and becoming an investor in the stakeholder society, the shareholder democracy, the property owning democracy. As Robert Shiller argues, “It is the change in thinking about ourselves that is the deepest cause of the bubble, and may be the slowest to unravel after the bubble comes to an end” (Shiller, 2008, 57).

Homeowners all over the world are now more likely to be experiencing the painful correction of the housing bust than the pleasures of rising asset values and big capital gains – the high that some thought would never end. For large numbers of people who risked all to “keep it alive”, the dream has now become something of a nightmare. Home – that important place of stability, shelter and sanctuary – is now also a place of risk, fear and anxiety where you’re often a prisoner of debt.  And rather than offering economic security, it now often symbolises financial hardship and loss.

Our cities have housing that is less affordable than at any time over the past century. Younger people may want to keep the Dream alive, but it may well be one of the many goals that the future looks set to deny them. Crucial questions need to be asked: Are our current models of growth and prosperity sustainable? For borrowers? For lenders? For the Australian economy? For future generations? For our children? For the environment?

The power and growth of the Australian economy between 1990 and 2005 was so strong that it has been labelled “the longest decade” of prosperity in Australian history (Megalogenis, 2006; Edwards, 2006). Real wealth increased more in this short space of 15 years than it had in the 30 previous years. But where is the legacy of this age of abundance? Where are the signs of this embarrassment of riches? If it didn’t take material shape in the form of large-scale infrastructure projects and better services, or public monuments and artworks, then perhaps it had a less ostentatious form in, say, a keener sense of responsibility to others?

Ballooning government revenues rarely ended funding forms of public investment or additional funding for research and development, or education and training, but went largely into personal tax breaks. The wealth that ordinary Australians secured led not to an enlarged spirit of generosity but to an expanding sense of entitlement. Expectations of limitless growth and steadily rising standards of living became entrenched.

I believe that we’re now slowly beginning to recognise the limits of a prosperity defined solely in terms of personal affluence and individual entitlement, of bigger, endlessly renovated houses and real-estate portfolios. And as we realise that the limits to growth are not only economic, but also ethical and ecological and environmental, we’re also beginning to reassess our reliance on models of ever expanding growth. And, hopefully, this realisation will also incorporate a redefinition of Australia and Australian prosperity as something more than simply “the quarry with a view”, as George Megalogenis has termed it (Megalogenis, 2006).

I also believe that we’re slowly realising that no nation can sustain itself by buying and selling real estate, and that, ultimately, a nation must act as more than just a marketplace. Households are often told that the essential wisdom of good financial literacy, and the key principle of economic security too, is diversification. Households are therefore recommended to have a diversified portfolio of assets and investments. This same piece of wisdom is no less relevant to nations and national economies. And on a number of fronts.

It doesn’t just apply to the tendency to sink all of our wealth into bricks and mortar, into our homes. Diversification of wealth should also be matched by a diversification of housing forms and tenures – not simply the Australian Dream of home ownership. And, in turn, this diversification could perhaps also lead to alternative definitions of prosperity that are not simply linked to ever-escalating mineral prices and ever more expensive houses.

References

Allon, F (2008) Renovation Nation: Our Obsession with Home, New South, Sydney.

Battelino, R (2008) “An Update on Household Finances”, 7th ITSA Bankruptcy Congress, 30 October.

Bourke, E (2008) “Homeowners in southwest Sydney feel the pinch”, ABC Radio PM, 3 October.

Economist (2009) “Buttonwood: Down and Out”, 25 April, 71.

Edwards, J (2006) Quiet Boom, Lowy Institute Paper 14, Lowy Institute for International Policy.

Krugman, P (2008) The Return of Depression Economics and the Crisis of 2008, 2nd edn, Penguin, London.

Megalogenis, G (2006) The Longest Decade, Scribe, Melbourne.

Quiggin, J (2008) “Blame where blame is due”, Australian Financial Review (Review), 24 October, 3.

Richards, A (2008) “Some observations on the cost of housing in Australia”, Address to the 2008 Economic and Social Outlook Conference, The Melbourne Institute, Melbourne, 27 March.

Sassen, S (2009) “Too big to save”, Open Democracy, 2 April 2009, <http://www.opendemocracy.net/article/too-big-to-save-the-end-of-financial-capitalism-0>

Schiller, RJ (2005) Irrational Exuberance, 2nd edn, Princeton University Press, Princeton.

Schiller, RJ (2008) The Subprime Solution, Princeton University Press, Princeton.

Stevens, G (2009) “The Road to Recovery”, Address to the Australian Institute of Company Directors, Directors Luncheon, Adelaide, 21 April.