Why the government should not bail out property investors

This second piece took a little longer than expected… home schooling is taking up every available moment, TBH 🙂

For this piece, I want to examine some of the philosophical and/or ideological arguments for and against government assistance in a time of systemic market failure – and particularly with regard to property investors.

Keynes and the collapse of the property investment market

AS the shutdown continues, government assistance has become an inescapable fact of economic and social life, for those who have lost their jobs or their businesses, or who face the loss of their homes.

Into the breach has stepped the government, however reluctantly: organising and monitoring the social response to the virus; controlling who enters our airports and ports; distributing medical resources and supplies as needed; offering financial assistance as our entire market systems grinds to a halt.

And why not? Keynesian capitalism is based on the (radical?) idea that markets sometimes fail – itself a clear truism given the economic collapse we are currently experiencing. Government guarantees and stimulus, of whatever form, are sometimes necessary to enable the entire market system to survive.

Is this even in doubt anymore?


Government provided bathers for all?

But can (or should) the government bail out everyone?

The answer to that must also clearly be no. And the reason comes from within one of the foundational tenets of market capitalism – individual freedom.

In Australia, this concept of individual freedom should lead to an understanding that the group least entitled to a government handout are the private property investors. Let me explain why.

A truism from the world of investment is that ‘When the tide goes out, you see who has been swimming naked’. This means in the good times everyone can dive in and invest, even if they don’t actually have the economic surplus to be doing so safely. In a boom, the returns keep coming, and everyone can share in them.

But once the tide turns, as it has most dramatically and drastically with the Covid-19 pandemic, then you start to see who is ‘swimming naked’ – overleveraged (in too much debt) and unable to maintain their investments.

In systemic terms, many property investors have clearly chosen their investment strategies on a ‘business as usual’ model, in which property prices will always continue to rise (the possibility of a Black Swan event like a pandemic was obviously even less on their radars). This basic misunderstanding of economic reality, that complex systems such as a property market will always function perfectly and prices will always go up, has meant that many property investors are now at risk of being left standing naked on the sand.

They have, quite clearly, forgotten that investment is, and has always been, a gamble. It is a risk, and always should be.

If investment is not a gamble, if the government stands behind everyone’s investment, then we face the moral hazard of a consequence-free investment regime.

And yet, we are already seeing their outstretched hand for government assistance

It would be logical for them to expect it of course, since negative gearing (another level of government market interference) exists to help them build their portfolios.

But there are two reasons why they should not (with the possible exception of self-funded retirees) receive assistance.

Coupon clipping in a crisis?

The first is the question of societal and economic value. Property investors, or to use the old term, landlords, are a sector of the economy with no meaningful or creative economic function other than to live off the proceeds of the property they control.

In this case, I am not talking about those who invest in the stockmarket, or those who live off what their Daddy left them (a big shout out to Gina!), for they are at least responsible for employment for thousands of other Australians as their capital is reinvested in productive enterprises.

There should also be an exception made for self-funded retirees; those using rental income to fund their retirement. They will be in a difficult position and are at the end of the productive employment age.

No, by ‘landlords’ I mean landlords in the most commonly understood meaning of the term. Those with their ‘portfolio’ of investment properties, all leveraged off each other and reliant on a steady and uninterrupted stream of rental income to service their debts.

They are not investing in new technologies, or opening new business and providing employment, or working directly in the wage economy. They offer very little in the best of economic times, and are worse than useless in this crisis.

For what this crisis has brought into focus, if nothing else, is the importance of those hitherto overlooked jobs that are crucial to the maintenance of society compared to the landlords. The essential workers such as medical and emergency staff, grocery retail staff, chemists and pharmacists, truck drivers, warehouse staff, cleaners and those working in the factories producing our essential products.

These are the people who need assistance – who deserve assistance – along with the many hardworking and productive Australians who have lost their jobs and risk losing their homes (whether rental or mortgaged).

The issue of economic freedom (or why there is no need to eat the rich)

The second argument against government assistance for property investors is a little different.

This is not a Marxist diatribe ‘bashing the rich’ – for landlords, by and large, are not rich. The great majority are debtors, for ‘property investment’ is merely a more polite way to describe debt.

But this is a debt burden freely chosen.

Yes, the problem is that this debt is repaid by others, who cannot, because of factors out of their control, continue to meet their landlord’s debt repayments. But the debt remains those who have chosen it.

So my second argument comes from within capitalist orthodoxy – the concept of individual economic freedom. This is why I do not advocate any government assistance to property investors and landlords, while supporting it for other economic and social actors.

Government assistance for businesses, renters, owner-occupiers and the unemployed – absolutely.

Government assistance for property investors – absolutely not.

The reason is because this is still an economically free society, in which private property rights are respected and individual economic freedom is still sacrosanct. But what goes along with this Individual Freedom (as any traditional conservative – if they still exist – or reader of Hayek can tell you) is the concept of Individual Responsibility.

This means not taking on unsustainable amounts of debt without accepting the personal responsibility for being unable to pay should your circumstances change. Any rejection of this bedrock assumption of capitalism (Caveat Emptor!) risks destroying the focus on individual responsibility which is, supposedly, the basis for the entire system of free exchange based on private property rights.

Bailing out property investors, in any form or method, is simply Socialising the losses while keeping the profits Privatised.

The difference between investors and owner-occupiers is one of choice

The difference with owner-occupiers? Those occupying their own houses, and who are facing unemployment and the inability to pay their mortgages, have not entered this same debt cycle as freely as the property investors. People, and families, need homes – and they will take on debt to meet that basic human right.

Businesses also should be protected as a public good – when the crisis passes, we will need still-existent businesses to start employing their workers again.

But this is all manifestly different from property investment. Property investment serves no public good other than supporting the industry which has grown up around the endless flipping of houses for individual profit – so by all means support real estate agents to survive under the crisis is over.

Once it is over, people are free to go back to buying and selling houses for investment again, and the real estate agents can go back to work.

But the individual investors invested as a matter of individual choice.

By all means, continue to invest in property – this us an economically free society still, no matter the increase in government assistance to those bearing the brunt of this coronavirus crisis.

By all means continue to insist on receiving rent – although those landlords who can afford to ‘take the hit’, or who are simply more public spirited, are offering a pause on rental repayments to assist their tenants. Hopefully government rental protection will help people stay in their rental properties.

But property investors cannot put our their hand for government largess in this crisis – the right to invest as a free actor in the market place is a matter of individual freedom, and comes hand-in-hand with individual responsibility. Private property investment is not a social good that needs to be specifically protected during the crisis.

The government does not owe you a pair of bathers if you are standing naked on a beach.