Bubble economy

Andrew Macrae
9 min readJul 13, 2016

Negative gearing in Australia was a way for people to write off the interest payments on loss-making real-estate investments against their other taxable income. Ostensibly it was designed to stimulate the supply of housing, but in fact, together with a 50 per cent tax discount on capital gains, it contributed to a boom in property speculation. This drove land prices higher, and allowed people to use the equity in their loss-making investments to buy even more loss-making investments.

People who got in on the action early became very wealthy, and rented houses to other people who, for a range of reasons, were not able to take advantage of the system.

One of the reasons some people could not get in on the action was that if you wanted to buy a house just because you needed somewhere to live, you did not receive any favourable treatment from the tax system. You thus competed in the marketplace with speculators who were financing additional loss-making investments on the back of capital gains as a result of all the people speculating on making capital gains when they sold their loss-making investments.

Another reason that people did not get in on the action was because they were not born yet.


This situation had benefits for many people in Australia, including those who were good with tools. You could buy a crappy apartment, grind and then polish the concrete floors, and sell the renovated unit for a tidy mark-up.

The big media companies also loved this situation. The national obsession with making money out of houses spawned many lifestyle shows about people obsessed with making money out of houses. These shows focused on renovating and redecorating old houses with materials made from resources dug out of the ground in Australia and sold to China to be turned by slaves into cheap decorations and building products so Australians could make their loss-making investments look nice for the people who rented them for less than the cost of the landlord’s loan repayments.

Another reason the big media companies loved this situation was because the internet had killed most of their traditional business in classified advertising. Media companies that owned newspapers, which were also loss-making investments, did, however, corner the thriving market for advertising houses online. They leveraged this by using their media properties to write articles about how great it is to buy and sell houses, how the fundamentals of the property market were strong, and how there was no speculative bubble in Australia.

The other people who loved this situation were those who acted as agents between buyers and sellers, and who thus made money by taking a percentage of the sale price of every house that changed hands. The peak body representing these people, the Real Estate Institute of Australia, did not look favourably on propositions to abolish negative gearing. They believed this would create a distortion in the market that was distorted by negative gearing. Business leaders in Australia generally did not like market distortions of any kind unless they worked in their favour, in which case they called the market distortions vital reforms.

In 2001–02, people with investment properties received $600 million in handouts from the government because their real-estate investments generated a loss.

In 2004–05, they received $3.9 billion.

In 2010–11, they received $13.2 billion.

In 2015, people with a disability received $17 billion in handouts from the government because they could not work.

Some of the people who received handouts because their investment properties generated a loss thought the people who received handouts because they had a disability were loafers.


Another thing to be said about this housing situation is that Australia was a beautiful place and people from all over the world wanted to live there. Sydney, in particular, was stunning. The weather was fantastic, the natural environment was amazing and the city had good urban infrastructure. No wonder people wanted to buy houses there.

It was a great time to own a property portfolio.

It was not so great if you lived on disability handouts in a housing estate, or if you were an Aboriginal person whose land had been stolen by the Crown and granted to people whose descendants then went on to make shitloads of money building, buying and selling houses on it, while you dealt with the effects of intergenerational grief and trauma and everything else that went along with having your land stolen and your people murdered by a bunch of other people whose descendants were doing great, and couldn’t understand why you didn’t just get over it.

It was also not so great if you were on a working holiday visa, slaving for 12 hours a day in the bowels of a food court and going home to sleep six in a room for which you paid half your wage to your landlord who was also your boss at the food court. Your landlord who was also your boss at the food court was actually making a profit on his loss-making real-estate investment, but he didn’t tell the tax office about it because he deducted your rent straight from your wage.

Sydney was a vast urban system for generating money. It was fuelled by real estate speculation, cheap labour from people on temporary visas, international capital flows, and cocaine produced by slaves in South America. The international capital flows were not regulated because Australia’s business and political elite believed in vital reform. The international cocaine flows were not regulated, either, because they were illegal, which did nothing to dampen demand for cocaine. The international people flows were highly regulated because only certain kinds of people were thought to be able to fuel Sydney’s appetite for cheap labour, international capital flows, cocaine and real estate speculation. These were people on temporary work and study visas, and people with money.

Most of the international people on temporary work and study visas lived six to a room and provided cheap labour for established businesses. The international people with money got visas by buying businesses where they could employ other people on work and study visas, and accommodate them six to to a room to provide cheap labour.

Apart from exporting commodities to China to be made into cheap decorations and building materials, Australia also exported education. In effect this meant that people who wanted to live in Australia could get a visa by paying poorly regulated training institutions tens of thousands of dollars for useless degrees. The high end of the education export market catered to the children of the people in China who owned the factories run on slave labour that made cheap decorations and building materials out of commodities dug out of the ground in Australia. These young people lived one to a room in houses their parents bought and they did not work in food courts. Instead, they drove around in luxury cars. There was a big market in Australia for luxury cars.

At the other end of the education export market were the people who paid half their wage to live six to a room, and who worked in food courts and on farms and in brothels. They paid the other half of their wage to be enrolled in useless degrees so they could spend their time working in food courts or on farms or giving blow jobs for three years, at which time their visa expired and they went home to be unemployed because they had spent three years getting a useless degree and working in food courts or on farms or giving blow jobs.


From one perspective, all this speculation on houses was unproductive economic activity. People became extremely wealthy by doing absolutely nothing that contributed to solving any of the myriad problems that faced humanity at this juncture.

A bubble economy formed, fuelled by a massive growth in private debt. The banks competed with each other to lend money to people who were competing with each other to pay the most for loss-making investment properties.

This process literally generated money out of thin air. Most of the people borrowing money to buy their loss-making investments believed that banks were just intermediaries, and that the money the banks lent them came from other people’s savings deposits that the banks held. In fact, the opposite was true. The banks held very little cash. Instead, they added new money to the system every time someone took out a loan for a loss-making investment property they had successfully bid too much for. Each new loan was a new deposit somewhere else, and the bubble expanded.

Because of all the speculation, these loss-making investments nonetheless increased in value and generated equity, which was another term for money that appeared out of thin air. People could use this money to buy more houses or luxury cars or cocaine.

Of course the intrinsic value of houses in Australia did not change, even as prices went up. Houses were still assets that people used for shelter. Sydney was still a beautiful place to live.

The problem was that people had competed so hard with each other to bid up the prices of their loss-making investments that there just wasn’t any further capacity for capital gain. The banks had also competed so hard with each other to see who could create the most money that they were starting to lend money to people who might not be able to pay it back.

There was also the issue that all of this activity was financed by thin air.


Many of Australia’s federal political leaders favoured the argument that the problems with the housing market could be solved by increasing the supply of houses. They liked this argument because they believed in classical economic theory and they still held on to the idea of a banking system that wasn’t just creating money out of thin air.

They also liked the supply argument because land release was under the jurisdiction of the state governments, which meant it was someone else’s problem.

One of the problems with the supply argument was that there wasn’t any new land being created in the inner cities where people wanted to live. The warehouses and factories that had closed because they couldn’t compete with the factories run on slave labour in China had already been turned into apartments with polished concrete floors. Releasing land out on the fringes wasn’t going to solve the problem of people competing with each other to see who could take on the most debt for crumbling inner-city slum houses that had been renovated with polished concrete floors and industrial fittings.

Another reason that supply wasn’t going to solve the problem was that classical economic theory could not account for the weirdness of the bubble economy.

In Melbourne in 2015 80,000 houses were left vacant––nearly five per cent of housing stock––presumably because it was simply less hassle than renting them out.


The bubble economy was paradoxical and weird, but everyone who was anyone — that is to say, bankers and real estate speculators — thought it was brilliant because of all the money they were making.

The banks had the power to create money out of thin air and then charge interest on lending it to people to buy loss-making investments. It was a giant casino, a national ponzi scheme, where the house always won and the only loser would be whoever was left holding the assets when the market crashed.

The situation was tolerated by the majority of Australians because they felt very rich when they saw that all the speculation on loss-making investments had inflated the price of their home. This was called wealth.

But it was all poised very precariously.

The banks knew the market was overvalued. They tightened up their lending practices and demanded bigger deposits. Because of all the speculation, there was a boom in the construction of apartments that were now all coming online at the same time.

Yet people still paid crazy prices for investment properties, betting that they wouldn’t be the last one holding the asset when the inevitable slide began.


The South Sea Bubble is the name of a financial crash on the English stock exchange that occurred in 1720.

The bubble concerned the shares of the South Sea Company, which was created as a vehicle to consolidate the war debts of the English government. The company’s main trade was in slaves. Shares in the company were bought and sold on the nascent stock market in England, and prices boomed on the promise of easy riches — and then crashed.

The cause of the crash is often blamed on greedy and naive investors, and corrupt and greedy politicians and business leaders.

But perhaps things were a little more complicated than that.

The South Sea Company held the debts of the English government, and it was backed by the English navy, the most powerful navy in the world at the time. The company had monopoly rights to the potentially huge market for slaves in the Spanish colonies in South America. These rights had been won in a treaty with England when Spain lost the War of the Spainish Concession.

So on the surface, the fundamentals were, as they say, good.

There comes a point, however, when the rational actions of individuals collectively create an irrational state.

Like Wile E Coyote chasing madly after the Road Runner for mile after solid mile, at some indeterminate point in our pursuit, we find ourselves walking on thin air, and it takes a moment for us to realise that the momentum of our rational assumptions has carried us over the edge of a cliff.



Andrew Macrae

Freelance writer and editor. Sign up for my newsletter about writing, freelancing and whatever is worrying me https://tinyletter.com/Andrew_Macrae