Time for housing affordability to be back on the parliamentary agenda

A fairly major issue that is affecting increasing numbers of Australians, has an enormous capacity to affect all our lives in the coming years due to its impact on the stability of society as a whole, and is getting worse month to month, has of course barely been raised in the election campaign at all, and when it was raised it was only in the most superficial, non-serious manner. In fact, it is probably the most urgent issue facing Australians under 30, but the big parties have just cynically used it to bash each other in relation to their existing policy platforms.

I am talking, of course, of housing affordability.

Now, I know that the solution I suspect is necessary – driving the investors back out of the market by, for example, restoring CGT to before-Howard levels for investment properties (NOT primary residences) – is not immediately politically saleable. But neither do the big parties’ present policies have buckley’s of helping. The first home owner’s grant simply increases house prices by more than the grant (due to the greater borrowing power it provides). The Liberals’ whinging about it being due to immigrants is simply cynical buck-passing: house prices didn’t spike suddenly after a sudden influx of new immigrants. They spiked shortly after the CGT was halved and the first home buyer’s grant implemented. We could cut the number of immigrants tomorrow (with the resulting extra suffering and hardship caused to them and the damage to our economy caused to us) and houses would continue to be unaffordable for almost everyone now entering the market. The claim that it can be blamed on land taxes and stamp duty is absurd – you could abolish those tomorrow and people would still bid up to the limit the banks allow them. As for releasing more land – well, that would help, but it wouldn’t solve the problem, which is that those without houses cannot realistically compete with those who already have equity in this inflated market, the investors.

Anyway, this post isn’t about convincing you what I think the answer must be. It’s about one thing: the issue being back seriously on the parliamentary agenda. This needs to be looked at urgently. The various excuses and rationales offered by self-interested parties (obviously people like real estate agents and banks are quite happy with an inflated market and couldn’t care less how much it harms the next generation) and those who think they’re benefiting from the inflation but really aren’t (baby boomers whose house is now worth more on paper, which is just as well because they’ll be having their adult children staying with them for a very long time) need to be given a fair hearing and properly assessed. The various solutions offered need to be studied properly by people who have the power and resources to get proper answers. The Senate looked at the issue in 2008, but nothing has been done since then. None of its recommendations were implemented by government.

The solutions may be complicated, and they may well not be what seems obvious to a thirty-something barrister who is far from an expert in either housing or tax policy. But whatever they are, they need to be found, and soon. It’s a self-perpetuating problem: the longer it lasts, the more entitled the short-term beneficiaries will feel about their windfall, and the more difficult it will be to reverse the trend.

Even if it was only mentioned superficially in the recent campaign, it should be a priority for this parliament. Particularly in any tax policy review.

UPDATE: The Government’s response to the 2008 Senate Select Committee was published in October 2009. In it, it promises to continue to allocate public money in ways that exacerbate the problem (eg the FHOG, cuts to duties) but look like they’re helping first home buyers, whilst actually only transferring public money to existing owners that they can then use to further price out homebuyers.

The significant issue, that of reviewing CGT and negative gearing, was simply referred off to a tax review to take place at some point in the future, when the Government will completely ignore the recommendations and sit on its hands while the crisis worsens.

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26 responses to “Time for housing affordability to be back on the parliamentary agenda

  1. “As for releasing more land – well, that would help, but it wouldn’t solve the problem”

    I agree that releasing more land is just a band aid solution Jeremy, and one which creates its own problems of urban sprawl (lack of schools, hospitals, public transport, road congestion etc) and of farm land that is closer to the cities (generally some of our best land) being permanently taken out of production as it gets paved over and turned into tacky colourbond suburbs.

    Bob Katter, for all that he’s an old loony, has suggested we attempt to decentralise Australia’s population, and make regional areas more attractive to young people looking to buy a home and start a family.

    It is still possible to buy a nice house in almost any regional center you choose to name.

    When fast fibre broadband is rolled out to these areas, and IF the Greens plan for fast rail connecting major cities and regional centres is achieved, it would be possible for young professionals like yourself to buy a home, use the net for your day to day business, work in town when you needed too and still be home in time for dinner.

    Its win-win, because the more young people move to the regions, the more money, progressive ideas and new opportunities come with you.

    Unfortunately it isn’t an overnight kind of solution, but real solutions rarely are.

    But hey, im no expert either.

  2. Tom Uren wanted to decentralise in 1972 the plans should still exist somewhere maybe interesting to reread them.

  3. the issue for me isnt supply or demand of houses.

    the 2008 report shows that demand for houses has increased a little (chart 3.15), but nowhere near the amazing increase in house prices.

    but look at chart 4.5! bank lending to australians has increased exponentially. its seems anyone can get a loan nowdays. but given that the banks can only lend money as a percentage of their reserve requirements (set by the reserve bank), where are they getting all this money from?

    the answer is, they are borrowing it from overseas and hiding it through off balance sheet businesses. aussie banks now hold $14.2 trillion in derivatives risks. should the counterparty call in the debt, (say another lehman bros collapse), aussie banks have no way to repay it. because their on sheet assets are less than 2.6 trillon!

    but any discussion about this could cause a general panic, and a run on the banks. so this is probably why politicians are very reluctant to address the underlying cause of the bubble.

    and this might be why the media would prefer to talk about CGT, immigration, demand etc

  4. The thing that gets me is that it truly is a self-fueling problem. The more the prices go up, the more people with existing houses think they should get in on that investment merry go round, thereby increasing demand. And the more money they can borrow and spend, since their houses are “worth” more. (And the more that they then raise rents to cover their greater expenditure, thereby locking more renters into poverty.)

    It’s no wonder that the graph above shows literally exponential growth.

  5. “As for releasing more land – well, that would help, but it wouldn’t solve the problem”

    It could help a lot. You might find the experience of Texas, as compared to its neighbouring states, instructive. Both free-marketer Dr Mark Perry and social democrat Dr Paul Krugman point to building restrictions as a key cause. Stronger consumer protection (ie, cooling-off periods after signing mortgages, itemised disclosure of fees) is also identified as important.

    See here and here.

    “I agree that releasing more land is just a band aid solution Jeremy, and one which creates its own problems of urban sprawl (lack of schools, hospitals, public transport, road congestion etc) ”

    As I’ve just mentioned, economic experts from across the ideological spectrum disagree it’s a minor issue. Also, the lack of infrastructure is hardly a reason to not release more land – just build more infrastructure! (As long as you don’t have a NSW Labor government in power, you should be fine on that front.)

  6. Don’t see why you’re so confident. Neither major party has done much in terms of building, say, public transport infrastructure over the last thirty years.

  7. Hi Jarrah,

    Should we build the extra infrastructure that will be required before this expansion of the suburbs when there is no need for it, or do we encourage further urban sprawl and then build it after it is already needed?

    Who will pay for the development of this infrastructure, and who will complain about paying more tax to achieve it?

    Where do we stop the sprawl, is there an arbitrary line where we say “here and no further” or do we just keep releasing more and more land for urban development?

    How do you propose to address the loss of valuable farmland to urban sprawl?

    (BTW it might just be me, but those links you provided don’t seem to work)

  8. yeh its self fulfilling.. the media needs to take some responsibility for spruiking this bubble, too

    its hard to go against the trend when your friends/family are making big capital gains, and the papers are all up in your grills about it

  9. jordanrastrick

    the issue for me isnt supply or demand of houses. the 2008 report shows that demand for houses has increased a little (chart 3.15), but nowhere near the amazing increase in house prices. but look at chart 4.5! bank lending to australians has increased exponentially.

    If prices are deterimined in a free market, which for housing in Australia they overwhelmingly are, then they are determined by supply and demand by definition. Demand means, essentially,”how many people are looking to buy a house at various price” – i.e. how much money is there chasing after property? I don’t know what charts you’re referring to, but any measure of “demand” for housing that doesn’t go up when banks are willing to lend more money to people buying houses is silly. It entails a high demand from banks for debt backed by property mortgages, which of course contributes to the overall demand for property itself.

    As for releasing more land – well, that would help, but it wouldn’t solve the problem

    What does this actually mean? That releasing more land would reduce housing prices, which would be good… but the problem wouldn’t be “solved”… because the prices would still be too high? How low do the prices have to go before the problem is considered solved? What quality distinguishes something that “merely helps” or is a “band aid” from something that is an actual solution?

    It could help a lot. You might find the experience of Texas, as compared to its neighbouring states, instructive. Both free-marketer Dr Mark Perry and social democrat Dr Paul Krugman point to building restrictions as a key cause. Stronger consumer protection (ie, cooling-off periods after signing mortgages, itemised disclosure of fees) is also identified as important.

    This. So far, Jarrah wins the thread. The use of actual evidence is a nice touch. Of course, no one has so far responded to the eminently sensible ideas mentioned:

    * Liberalising development restrictions to encourage higher density use of existing land (which doesn’t contribute to the dreaded sprall)
    * Increasing consumer protection and transparency in the mortgage market to remove inefficiences that may be contributing to high prices.
    * To give due credit to Jeremy, the points about distortionary taxation incentives to do with CGT (not to mention negative gearing!) are totally on the money as well.
    *Infrastructure! Well people are happy to pooh-pooh as some sort of fanciful pipe dream the idea of the government paying for infrastructure that will allow us to utilise currently developed land more effectively. No one makes any serious suggestion about what a better use of taxpayer funds to address the issue would be.

    How do you propose to address the loss of valuable farmland to urban sprawl?

    Personally, I propose to address it by exporting slightly less of our massive agricultural surplus.

    No one in Singapore or Manhattan or Switzerland or Britain or Taiwan seems especially worried by the fact that all their land is being used to do banking and software development and physics and songwriting and medicine and blogging and high tech manufacturing, instead of feeding cows and growing wheat. I guess when World War 3 comes along and they all starve to death the joke will be on them though, right?

    It’s about one thing: the issue being back seriously on the parliamentary agenda. This needs to be looked at urgently.

    No, it doesn’t need to be looked at that urgently. I don’t like paying such a high proportion of my income on rent anymore than any other member of Gen Y or X or whatever it is. However, there’s no way that this is anywhere near the top of the economic priority list. First, we need:
    1) A carbon price;
    2) A mining tax (or some other measure to address the resource state/non-resouce state structural issue);
    3) A redress of the vertical fiscal imbalance, which is seriously corroding federalism.
    4) Welfare reform (the needs of people who will never be able to buy a house should take priority over those who are just having difficulty reaching a deposit because they keep maxing out their credit card..)
    5) A few more of the more low-hanging fruit items from the Henry Review (e.g. making fees etc for motorists more usage based)

    If this parliament can even scratch the surface of the above, I’ll be impressed. Housing can wait.

    Hell, if we’re lucky maybe in the meantime the bubble will burst and bring things down 20% or 30% without Canberra doing anything….

  10. This is the thing to me. Of all factors, the invasion of the market by investors, now well and truly established and self-perpetuating, must be broken before anything else. Even if you build more homes, even if you exiled every immigrant, as long as the people who want to buy homes are stuck renting, by the market pricing them out, there’s no stopping the escalation. Every increase prompts more investors into the market, or those in the market to apply more of their equity to taking houses from home-buyers. Every increase gives those investors more money to spend pushing up the prices to give other investors more money to spend pushing up the prices to give other investors more money to spend pushing up the prices to give other investors more money to spend pushing up the prices. It’s a ponzi scheme, where those who come in late need to keep more suckers down to keep from losing their “investment”.

    And a natural, market-based correction – ie, a bursting of the bubble; a crash – is something governments will do anything to avoid.

    The more we let it grow, the more devastating the consequences, and the less we’ll be able to do about them.

    Before ANYTHING else, we need to push the balance back towards homebuyers and away from investors. Increase rental rights. Treat capital gains on non-primary residences like any other form of income, rather than preferentially.

    Obviously the first step is for governments to admit that there’ a problem, and bring the public with them on why this is necessary. But it must be done soon.

  11. whatever your textbook definitions of “demand”, the evidence is still that credit expansion is the major cause of this bubble.

    house prices have increased 300% in 10 years. but the population hasnt tripled in that time. and 2 out of 3 homes havent burnt down either.

  12. duncan1978, my apologies, I fluffed the HTML apparently. Here you go:
    http://mjperry.blogspot.com/2010/07/how-texas-avoided-great-recession-and.html
    http://motherjones.com/kevin-drum/2010/04/texas-mystery-revisited

    “Who will pay for the development of this infrastructure”

    Governments (ie, us the taxpayers), through levies and taxes and borrowing, and private companies, either in tandem or independently. Same as always. How do you think we got the infrastructure we have now?

    “do we just keep releasing more and more land for urban development?”

    Yes. We also liberalise city development so we don’t have forced low-density that is energy-inefficient and resources-inefficient. Methods of encouraging regional development are worth looking at too.

    “How do you propose to address the loss of valuable farmland to urban sprawl? ”

    If it’s that valuable, it won’t be built on. If the slow loss of farmland to houses creates problems for our food supply, this will be reflected in prices, making it more valuable to produce food on the remaining arable land, stopping development. Correcting the artificially low price of fossil fuels would help a lot, by making transportation of food show its real price, and thus encouraging local growing to some extent. I hope that answers your questions.

    “And a natural, market-based correction – ie, a bursting of the bubble; a crash – is something governments will do anything to avoid.”

    Jeremy, I’m glad you see one of the problems of government intervention in the market 🙂

  13. “No one in Singapore or Manhattan or Switzerland or Britain or Taiwan seems especially worried”

    Really?

    Then why are many wealthy European, Asian and Arabic nations are buying up farm land all over the world, if not to ensure their own food security?

    Are you aware that the security, mass migration and economic problems that result from food shortages are not limited to the places where food is actually scarce?

    “..banking and software development and physics and songwriting and medicine and blogging and high tech manufacturing”

    “My lady, the peasants have no bread”

    “Then let them eat blogs”

    Glad you’ve solved the problem of global food security there, Jordan.

    I wonder why nobody else thought of that…

  14. “Jeremy, I’m glad you see one of the problems of government intervention in the market :-)”

    But the longer it goes, the worse the crash will be. And if there is no crash, if governments prop up this market, then they will be doing so at the expense of an increasing proportion of their citizens.

  15. “But the longer it goes, the worse the crash will be. ”

    And now you see one of the other problems of government intervention in the market. The GFC has some of its roots in exactly this kind of thing.

    “then they will be doing so at the expense of an increasing proportion of their citizens.”

    And now you see yet another problem of government intervention in the market! We’ll bring you to the dark side yet 😉

  16. Cheers Jarrah,, ill have a look at them momentarily.

    “If it’s that valuable, it won’t be built on.”

    I don’t agree Jarrah, the per acre price of prime agricultural land is determined by how much food or fibre can be produced on it.

    Currently, good land in high rainfall areas goes for a minimum of $4000 an acre, up to $10,000 an acre with irrigation.

    The same acre can be developed into 6 average suburban blocks, each selling for what $150,000.

    There is only one crop I know of that could compete with that, and the government don’t seem too keen on letting me grow it!

  17. “Correcting the artificially low price of fossil fuels would help a lot, by making transportation of food show its real price, and thus encouraging local growing to some extent.”

    Totally agree, but we still can’t compete with property developers.

  18. “I don’t agree Jarrah, the per acre price of prime agricultural land is determined by how much food or fibre can be produced on it.”

    Specifically, how much that amount of food or fibre will sell for, ie its value to others. If the value to others of keeping it as productive land is less than the value to others of turning it into housing, who are you to say that’s wrong?

    “Currently, good land in high rainfall areas goes for a minimum of $4000 an acre, up to $10,000 an acre with irrigation. The same acre can be developed into 6 average suburban blocks, each selling for what $150,000.”

    Assuming you’re right for the sake of argument, that’s the price given the current set-up. The subdivisions are expensive because supply is so restricted. Once you get more subdivisions, even more potential subdivisions, they drop in price.

  19. The property investors are clearly the problem and I have to confess, I’m one of them. To be honest, it is not that great, the return is crap compared with the hassle (I had a feral tenant from hell who appeared to be an avid watcher of “Today Tonight” and knew all the tricks in the book). Prior to that I had two tenants from a racial minority usually slagged off beyond belief and they were perfect. Good luck to them, they moved out and bought a house.
    Anyway I digress. Jeremy is right, wealth generates wealth and if you have equity, you can buy more property, whether it is shares or houses. There is no doubt that my buying a rental made the houses more expensive for renters.
    Get rid of negative gearing and I reckon the situation will sort itself.

  20. “Specifically, how much that amount of food or fibre will sell for, ie its value to others.”

    Farmers don’t get to set their prices Jarrah. Multimillion dollar, often foreign owned corporations get to do that. You are like a man who sells his fishing rod for enough money to buy some fish.

    ” If the value to others of keeping it as productive land is less than the value to others of turning it into housing, who are you to say that’s wrong?”

    That depend on whether you consider short term financial gain for a small number of people more important than long term food security and export dollars, which benefit the entire country.

    “Assuming you’re right for the sake of argument”

    No need, just do a few minutes research on a search engine with the words “rural properties for sale” in the search bar.

    “Once you get more subdivisions, even more potential subdivisions, they drop in price.”

    At which point the productive land now covered in suburbs would be more valuable as farmland, but would be unable to be used for this purpose.

  21. whats this got to do with the price of tea in china? or in this case, the price of houses in australia?

  22. “Farmers don’t get to set their prices Jarrah. ”

    Perhaps I wasn’t clear. The value of farmland is determined by the value of what it produces (ie the price). If the value of that produce is less than the value of making it available for housing, to not do so is to waste society’s resources.

    “whether you consider short term financial gain for a small number of people more important than long term food security and export dollars, which benefit the entire country.”

    You are conflating transactions with embedded value. Also, the best food security comes from diversity of supply. Take bananas for example. Because of our restrictions on banana trade (which I mostly agree with, BTW, but let’s leave biosecurity aside for the moment as its irrelevant to the example), when the plantations got knocked down, the price went way up. That wouldn’t have happened if we had diversity of supply.

    Look at it this way – prices are there to indicate what priority we should put on our various needs and wants. If land for housing gets a better price than using it for bananas, then what it is telling is that we should prioritise housing – the best use of the land. If the price is artificially high because of building restrictions – as noted by at least one Nobel laureate from one end of the capitalist spectrum and distinguished professors from the other – then we should eliminate them as far as possible so that we can prioritise properly.

    That is essentially what’s wrong with price controls – the incentives get borked, and the system can’t provide for our needs and wants as well as it could.

    “At which point the productive land now covered in suburbs”

    Yeah, right, because we’re going to instantly go from hundreds of thousands of square kilometres of arable land to one giant city when building restrictions are reformed.

  23. http://www.debtdeflation.com/blogs/2010/05/11/is-it-all-%e2%80%9csupply-demand%e2%80%9d/

    Steve Keen does a great job of explaining why the current bubble has little to do with supply or demand

    but i can sum it up for you pretty easily: if the bank gives everyone $1 million loan to buy a house, what do you think will happen to prices?

  24. Steve Keen is a crank from a third-rate university who was so confident about his predictions about debt, interest rates and and house prices that he bet Rory Robertson prices would fall 40% (!) and interest rates would hit zero.

    He lost, and had to walk from Canberra to Mt Kosciuszko with a T-shirt saying “I was hopelessly wrong on home prices! Ask me how.”

    But I admire him for selling his investment property on the basis of his predictions. At least he put his money where his mouth is. Also, he’s right that debt fuelled the boom that turned to bust. But any economist who isn’t drinking the Keynesian Kool-Aid could tell you that, and he’s still just a contrarian who has to give away his book for free because no-one will buy it.

  25. yes Im aware of his adventure up the mountain 🙂 but I think he’ll be vindicated soon

    the reserve bank bought up all the toxic mortgage debt from the aussie banks, so they’re free to lend again. but all the money they lent is still out there in the economy, plus now they are lending the same again.

    you cant keep increasing the monetary supply without some nasty consequences. although Keen was quite wrong on the timing!

  26. Pingback: COAG abandons housing affordability issue | An Onymous Lefty

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