Who benefits from covid?

While most of the world suffers death, illness, job losses, and pay cuts, the super rich are getting richer. In fact, billionaires’ wealth has hit a new high, increasing by more than a quarter during the height of the pandemic. Just over two thousand people now control more than ten trillion dollars.

Ten trillion dollars is around half of the United States GDP. Just under the entire GDP of China, or double the GDP of Japan.

A million, a billion or a trillion

The difference between a million, a billion, and a trillion is pretty hard to visualise. Linguistically, it’s a minor change: an alteration of a single letter or sound at the beginning of the word. But mathematically, it’s enormous:

1 million = $1,000,000
1 billion = $1,000,000,000
1 trillion = $1,000,000,000,000

Put another way, one billionaire has as much money as a thousand millionaires. And a trillionaire would have as much money as a million millionaires.

Jeff Bezos, considered on track to become the world’s first trillionaire in 2026, has a net worth of almost $200 billion currently. His money and assets divided up could make 200,000 people millionaires.

But it’s not only the super-super rich who have been benefiting from covid. The regular rich have also done far better than their middle and working-class (or, heaven forbid, unemployed) neighbours.

And much of this disparity is exacerbated by government policies.

Government policies and inequality

In recent months, the Australian government announced a new grant scheme to boost housing construction and renovations. At a time when industry insiders say they don’t need the extra work. ‘It’s too early’ commented one worker in the industry on the ABC following the announcement, reporting that work was – actually – booming.

In my previous post, I outlined how recent government decisions will likely result in fewer small-time landlords, and more big-time players. And now, it seems, this latest decision will drive a similar wedge between wealthy and less wealthy homeowners. ‘Not everyone will qualify’ warns the ABC, reporting that ‘the scheme’s free money won’t come cheap’.

‘Not everyone’ would appear to be an understatement. As the ABC reports, there are 7.7 million private dwellings in Australia according to the ABS. But the government expects just 27,000 homeowners and builders to access the scheme. That’s just 0.35%.

Who is in the lucky 0.35%?

The scheme involves handing out grants of $25,000 to eligible homeowners for new builds or renovations. But the keyword here is ‘eligible’.

Who exactly will be among the lucky 0.35%? Those doing it the toughest? The homeless looking for permanent housing? Those in areas hard-hit by bushfires? Those with special needs?

Let’s take a look at some of those eligibility criteria:

1) couples making more than $200,000 and individuals making more than $125,000 are excluded.

While the scheme is means tested, the government is planning on handing out grants to individuals making up to $125,000 a year, and couples earning up to $200,000.

Last year, the average Australian worker earned about $65,000, and the average full-time worker about $85,000 a year. In other words, the government’s upper limit on this scheme is approximately double the average worker’s income.

For a household, $200,000 is the equivalent of earning $3,846 per week. Australia-wide, that sort of an income would place your household in the top 80th percentile. And in South Australia and Tasmania, a combined household income of $3,846 per week would place you in the top 10% of households.

In other words, even though it is means tested, no one but the very highest of income earners will be excluded from this scheme. And many well above-average earners will be able to receive an enormous boost in their assets, while JobSeeker and JobKeeper payments are in jeopardy.

2) new builds will be capped at $750,000

That’s right. Three quarters of a million dollars.

The average cost of building a home in Australia is currently around $320,000. The government’s offer therefore seems very generous, offering to subsidise a large chunk of the building of homes which cost well over double this sum.

Of course, in order to borrow such a colossal amount of money, you would need to be at the upper end of the income tree, anyway. According to Your Mortgage’s borrowing power calculator, an individual with no dependents and unusually low outgoings and no other debt earning $125,000 a year would be able to borrow just over $750,000. But they’d still need a substantial deposit of $200,000 or more to cover the various fees and taxes associated with buying a property, as well as to avoid lender’s mortgage insurance.

An average worker with $65,000 a year, on the other hand, with the same sort of modest outgoings, who is somehow also debt-free, would not be allowed to borrow anywhere near that sum. Even though their income is 52% of what the $125,000 a year worker earns, a bank would likely offer them just over $300,000.

3) renovations can cost anywhere between $150,000 and $750,000

If you thought the government was being generous in supporting the building of three quarter of a million dollar homes, then just wait until you cop a load of what they’re willing to support for makeovers! Renovations worth up to $750,000 are eligible for the grant. Yep. There’s a government subsidy for a renovation worth almost 2.5x the cost of the average new home. Meaning if you already have a $750,000 house, you’re now eligible to upgrade it to a $1.5 million dollar home, with government help.

But really, I’m more concerned about the other end of the scale. There’s a minimum spend of $150,000? What middle-class Australian family can afford that for renovations? And on an average house, where would you even begin?

Renovating the typical Australian home

Let’s take an example of what is a fairly ‘typical’ home. A three bedroom, two bathroom, double garage brick house. Priced at $390,000 to $410,000 and located in a regional but not rural area of Victoria (Ballarat), it’s fairly representative of a pretty average priced house in neither the city nor the country.

Realestate.com.au provides a ‘renovation estimator’ based on a home’s location, size and so on. Here are its guidelines for such a home:

Basic, mid-range and luxury renovation costs for a typical Australian home

In other words, even when renovating every single room in a typical family home with two bedrooms and two bathrooms, only those who can afford the highest end luxury in every space will spend enough to be eligible for the government’s scheme.

Clearly, these grants are designed for those who have expensive tastes and large homes.

Who can afford a large, expensive home?

With Australia’s personal debt at the second highest in the world last year, and the ABS classifying around a third of Australians as ‘over-indebted’ well before Covid19 hit, very few normal Aussie families will have either the cash in the bank to spend $150,000 of their own money, or the ability to borrow $150,000 more from the bank.

Late last year, almost 40% of Australians reported they were struggling to pay off their debts. When it comes to millenials, this figure was closer to 50%.

And remember, this was before the personal, environmental, and economic devastation wrought by the bushfires and the pandemic.

In the last few months, thousands of Australians suffering reduced wages or job losses have taken up the banks’ offer of a ‘holiday’ from their loans. But as I detailed in the previous post, for many with high debt-to-equity ratios, this seemingly ‘generous’ offer could result in them losing their homes altogether, if their debt ends up exceeding the value of their home. Which it could, if house prices crash as much as predicted.

4) the house being renovated must be valued at less than $1.5 million

If you weren’t already convinced that this is a grant for the well-off, then this should be a big clue. $1.5 million is more than three times the cost of an average established home, and close to five times the cost of an average new build. Just how well-off do you need to be to own a $1.5 million house?

In 2018, Domain reported on the values of properties at various price percentiles. It’s worth noting that these figures refer only to capital cities, where prices are typically far higher than in rural and regional centers. Even so, a home costing $1.5 million would fall into the 90th percentile in every capital city in Australia other than Sydney (where it would still be in the 75th percentile). And in every city an apartment valued at $1.5 million would be in the 90th or 95th percentile.

In other words, only the top 5 to 10% of homes and apartments, in capital cities would be considered ineligible for this grant. I have to imagine this figure would be immensely lower in outside of capital cities.

The remaining criteria are most interesting discussed in tandem:

5) the scheme is only for owner occupiers, no investment properties,

6) any renovations must improve the accessibility, safety or livability of the home

7) owner-builders or owner-renovators who do not enlist the help of builders are not eligible.

The fifth criterion, which excludes investors, makes perfect sense if we understand the scheme as intended to provide assistance to average Australians – middle class couples and families – and ‘battlers’. The two groups politicians love to focus on in their speeches.

But as the first four criteria make clear, this isn’t a grant for average Australians, let alone for battlers. Number three makes this the most obvious – the requirement for a minimum spend most average Australians couldn’t afford, let alone those doing it tough.

More realistic figures

While the average worker may earn $85,000 (full time), in all states other than the ACT and NT, more than 20% of the population earn less than half this amount. With $42,500 a year and the same outgoing expenses as the other examples we modeled above, the YourMortgage calculator estimates a borrower would only be eligible to borrow $140,000. In other words, not even enough to meet the government’s minimum threshold. And as we’ve already seen, even a relatively well-off family with a typical family home making mid-range upgrades to every single room wouldn’t come close to meeting the government’s minimum threshold either.

What about those who actually need help?

This is unfortunate, in light of the sixth criterion. Renovations to improve a home’s accessibility, safety, or livability would seem to be ideal for older Australians or people with disabilities who might want help building ramps, modifying a bathroom, or changing doorknobs, for improved accessibility.

Less well-off retirees and people with disabilities with lower incomes might well be enthused about having a portion of these often costly renovations covered by the government. But it is unlikely that anyone other than the wealthiest of people will be able to afford to make enough modifications that they would be eligible for the government’s support.

While Australian figures are hard to come by, US disability remodelling estimates suggest an average cost of $5,233 USD (around $7,500 AUD). Even at the $20,000 upper end of the spectrum (close to $30,000 AUD), that’s still a long way off the government’s required minimum spend. In fact, it’s just a fifth of the way there. You’d have to be able to afford a heck of a lot of cosmetic changes on top of the really necessary ones to become eligible.

So if the point of the scheme is not to help the homeowners who are doing it the toughest, then who is it to help?

The real beneficiaries

The sixth criterion, which excludes owners who wish to build or renovate rather than hiring a professional builder, gives us a clue. This rule makes sense if we understand the point as helping the building industry – an industry which, it seems, doesn’t need help (at least yet) – and might actually prefer the assistance come in later.

It does, however, seem unfair to those young people, couples, and families who are trying to work to a budget. Working on a home yourself is a great way of cutting costs and completing works as you can afford them. It seems grossly unfair that someone who can afford to have a professional builder come in and work on their renovations can get governmental assistance to pay for both their labour and materials, while someone else who is unable to afford professional builders must pay for their materials in full. A fairer scheme might have been to help cover the costs of labour only, excluding materials, and encouraging even more people to hire certified builders, and creating more work.

But if the primary aim is to create work, then why exclude investors?

Outcry and oversight

I can only imagine the decision was to avoid the (very understandable and correct) outcry which would inevitably have arisen had investment properties been included in this scheme.

But speaking of investment properties highlights what would appear to me to be an important ‘oversight’.

While there is an income test, none of the reporting I have seen describes an asset test, other than the value of the property itself.

There is nothing to stop someone with millions of dollars in assets, but a relatively small income, getting government assistance to fit out their $1.5 million home with even more obscene luxuries.

And what section of society tends to have lots of assets and a lower income?

The ‘Boomer’ and ‘Builder’ generations.

In other words: Coalition voters.

As this 2013 piece in the Conversation shows, Labor and the Greens dominate in the 18-49 age groups, while the 50-65+ age groups are very pro-LNP.

Today’s older Australians have substantially greater wealth and income than did the same age group in past decades.

Before we start saying ‘that’s because they’ve saved and worked hard!’ it’s important to take note that today’s older Australians are also dramatically outspending the older generations of years-gone-by.

Older Australians spend far less of their income on essentials (in part because many do not have to contend with the mortgage expenses younger Australians have to), but considerably more on non-essentials, with bigger ‘miscellaneous’ and recreational spends than any other age groups.

Those aged under 54, on the other hand, are cutting back on pretty much everything – including alcohol, tobacco, clothing, cosmetics, and household services and furniture.

As the article explains, this gap is exacerbated by the fact that older Australians pay far less in tax than younger Australians, despite receiving far more benefits. And before we start saying ‘but they’ve paid their taxes, and now it’s their turn to get some help!’ it’s important to note that the typical 40-year-old today is contributing twice as much towards the retirement of others through taxes than did their babyboomer counterparts. And funding their own retirement in full.

So what have we learned?

The primary recipients of the government’s scheme will not be average Aussies, and certainly not battlers, but the well-off.

They’ll be people who can afford $750,000 homes, and renovations that cost, at minimum $150,000. People who intend to get others to do the labour for them.

Even though the government hasn’t slapped a minimum income requirement on this grant, in effect, they have restricted it to only those who have high enough incomes to borrow that much money from a bank, or those who have enough in assets to pay for it out of pocket.

Aside from age, what else do we know about LNP voters?

They tend to be much better off than the rest of Australia. In both the US and the UK, how much money you have is a strong predictor of who you will vote for.

In Australia, we like to think that we don’t have a class system, but as a 2016 survey shows, the vast majority believe social classes still exist in Australia. Greens voters were the most likely to agree with this sentiment, at 94%, and the LNP voters were the least, at 81% – although that’s still a huge majority.

Just 28% of LNP voters considered themselves ‘working class’ compared to 42% of Labor voters. wmEANhile a whopping 62% described themselves as ‘middle class’ compared to 48% of Labor voters. No party had more than 2% of its supporters describe themselves as ‘upper class’.

Deceptive perceptions

Interestingly, when asked which groups the Liberal and Labor parties represent, the answers were pretty clear cut. 39% of people believe Labor primarily represents the working class, which is broadly in line with the number of Labor voters who self-identify as working class. But a mammoth 53% of people believe that the Liberal party represent the upper class. even though only 1% of their supporters put themselves in this group.

As the article concludes, even though the vast majority of Australians consider themselves middle-class, neither party in the Liberal-Labor duopoly is thought to represent middle-class Australians.

This infographic from McCrindle shows just how neatly older Australians – those who overwhelmingly vote LNP in other words – fit the bill.

Australian Income & Wealth Distribution by Generation (Source: McCrindle)

Lining the pockets of those who least need it

With around $1.4 million in assets and a low enough household income to be eligible, this scheme looks set to further line the pockets of those who least need it. It won’t do anything for less well-off retirees who need improvements to make their homes safer or more accessible, or assistance in reducing their electricity bills – renovations that wouldn’t meet the government’s eligibility criteria. In fact, ‘sustainability’ is notably absent from the government’s requirement that any renovations must improve the ‘accessibility, safety, or livability’ of the home. And it certainly won’t do anything for younger Australians who lack the earning power required to borrow even more money than they already owe.

In fact, the only younger Australians who will receive payouts through this scheme will likely be those who can borrow money from family to build, or who have abnormally high incomes and meet banks’ eligibility criteria. Yet, as research from the RBA shoes, high levels of debt creates more cautious consumers. If the goal is to stimulate the economy, then why would we encourage more young people to get into debt?

I believe the answer is that this scheme isn’t intended for young people any more than it is for middle-aged, middle-income people, or for older less well-off people. It’s intended to secure votes from the LNP’s base.

After all, it wouldn’t be the first time in recent memory they designed a handout for those most likely to vote for them.

Or the second time.

Or the third.

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