Yesterday, Fairfax’s Michael Pascoe published an article quoting the RBA’s Head of Domestic Markets, Chris Aylmer, arguing that the recent lack of appreciation in Australian housing prices is stifling entrepreneurialism, since would-be entrepreneurs are no longer building-up equity in their homes, which is precluding them from gaining bank financing to start new business endeavours. From The Age:
The Law of Unintended Consequences is always hard at work. What if an extended period of subdued house price increases – the preferred path to more affordable Australian housing – effectively wiped out a generation of would-be entrepreneurs?
It was a possibility raised by the Reserve Bank’s head of domestic markets departments, Chris Aylmer, at a Mortgage and Finance Association of Australia lunch in Adelaide…
The possibility or question is based on the role sharp increases in house prices played in providing the funding for new businesses in previous generations: Get on the mortgage treadmill, watch the value of the house rise to create equity that can then be borrowed against to fund a new enterprise, for better or for worse.
Aylmer suggests the current generation of would-be entrepreneurs are unlikely to be able to repeat the process.
I fail to understand the logic behind Pascoe’s & Aylmer’s argument. Surely, it’s much easier to be an entrepreneur if you’re not trying to pay-off one of the world’s most expensive houses?
Indeed, the main reason why I took the risk of leaving Goldman Sachs to concentrate on MacroBusiness full-time (a start-up business) is that I had all but paid-off my house and was in the fortunate position not to be saddled with onerous mortgage repayments. Had I a large mortgage, like many Australians, there is no way that I would have left a high paying, relatively steady job, to work on a business where pay is much lower and irregular, and where the outcome is unknown.
High levels of mortgage debt act as a restraint on entrepreneurialism, not as an enabler, since by necessity it ties people to stable employment so that they can meet their mortgage repayment obligations. Higher land prices, more generally, also increases the cost of doing business (via higher rents), which is further poison to would-be business owners.
Lower land prices, improved housing affordability, and lower debt are keys to improved entrepreneurialism and innovation, not the other way round.
H/t to PFH007, here is the audio from the MFAA session comments in the lunch break:
