From the article:

The first thing you notice are the houses. Not the properties themselves, which are unremarkable, but the prices and how they find their way into every other conversation: In 2023 Sydney had among the highest price-to-income ratios on Earth at 13.8x. It was beaten only by Hong Kong at 16.7 (even San Francisco was only sitting at 9.4 thanks to its high incomes).

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But this tax change isn’t enough on its own to create the modern Sydney property market. A hugely leveraged bet on asset prices just to reduce your tax bill sounds insane in a vacuum - even if it’s positive EV, normal households don’t tend to have that kind of risk tolerance.

The trick is that the negative gearing rules mean that the government subsidises the risk. Owning a money-losing rental is fine, because the losses just mean you pay less income tax. You can hold onto it and keep putting in money, and when you sell the capital gains are taxed at half the rate of your income. And you can expect those capital gains to be positive, because this system is a near-perfect incentive structure to make the population funnel all their investment capital into the property market.

It gets even better. You might expect this demand shock to be softened by a supply response, but of course Australia has a classic Anglosphere zoning situation that holds supply fixed. The only thing that can move are prices.

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On the demand side the main factor is credit. Mortgage rates fell from 17% in 1990 to 2% in 2021. You have to remember Australia has gone three decades without a recession; the 2008 crisis never happened here. The quantity of credit available is enormous, for a variety of reasons too complex to get into here. Australian banks have slowly moved from government-enforced rationing of housing credit in the 1980s to having their books dominated by mortgages. The scary part of this is that Australia essentially only has variable rate mortgages. The entire house of cards that is Sydney is exposed to international impacts on rates on a short feedback loop.

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This all seems to make sense. So why is the superannuation pool so large if the incentives to buy property are so strong? Because the government mandates it. Employers must contribute 12% of pre-tax wages to investment accounts, which the employee can only withdraw for retirement or in special circumstances like terminal illness. It’s basically a forced saving scheme in the form of equity investments. Suppress wages but ensure younger generations don’t have to support huge cohorts of elders who didn’t save for retirement.

This seems much better than the tax-funded pensions common in the rest of the anglosphere. But there are some caveats. Australia has traditional pensions too, which many elders draw from. The flat tax rate (15%) on contributions is regressive. And there is the question of where the money is invested. Australia’s superannuation funds are enormous; they don’t just distort the domestic economy, because they are too large for it, and so a large part of Australia’s retirement savings now depends on international equity markets. This means that the Australian social contract is now exposed to subtle variations in transformer scaling laws.

There’s just so much money in this mining → property/equities pipeline that it sucks up all the talent. Even marginal tweaks at such a large scale are insanely productive, so there’s no incentive to work on anything else. You’re better off trying to get a fraction of a percent more out of billions of dollars. But that means Sydney feels very zero-sum: Australian productivity has been flat for a decade, and everyone is fighting over a piece of these enormous fixed pies. Even a little piece is enough to set you up in ease and comfort, but at the end of the day there are only so many jobs at the big firms and so many properties within commuting distance of Circular Quay.