Prime Minister Malcolm Turnbull understands Australian housing is a bubble. How do we know this?
In his 2005 tax policy paper, Turnbull told us as much when he described negative gearing and the CGT discount as a “sheltering tax haven” that is “skewing national investment away from wealth-creating pursuits, towards housing”, and has caused a “property bubble”.
In 2010, Turnbull went even further, penning the following in Fairfax [my emphasis]:
HSBC recently calculated that the total value of China’s residential property market was now 3.27 times GDP, which is nearly twice the peak reached before the subprime crisis in the US and approaching the levels in Japan during its 1980s property bubble.
Asset bubbles are like a Ponzi scheme – everything is fine until the cash dries up and asset prices stop rising. Like it or not we are exposed to the Chinese property bubble. The iron ore China buys from Australia is turned into steel, and most of that goes into building apartments and infrastructure. Our bauxite and alumina exports are turned into aluminium, of which about 40 per cent goes into construction in China.
So at the same time as we congratulate ourselves on escaping from the consequences of the property bust in the United States, the resources boom that underpinned our strong economic performance is itself based on another debt-fuelled property boom in China.
So, according to Turnbull’s own analysis, China had a big property bubble when its housing stock was 3.3 times GDP. And yet only recently RP Data valued Australia’s dwelling stock at $6.4 trillion, which places it at an incredible 3.9 times Australia’s GDP!
It’s safe to assume that Turnbull knows this and therefore believes that Australian housing is one giant bubble, which is why he is so against any policy that might destabilise it, such as reforms to property tax concessions, even if it is in the longer-term interests of the nation.
We can also assume that the RBA thinks the same way. In June 2010, Captain Glenn Stevens issued the following warning about Australia’s then record high household debt:
Reserve Bank governor Glenn Stevens is urging Australians to reduce household debt and increase savings, while the economy remains strong and the risk of financial hardships are low.
In a speech given in Sydney, Mr Stevens said the European sovereign debt crisis carried a lesson for Australians that “potential vulnerabilities need to be addressed in good times, even when markets are not signalling unease”.
“One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.”
Nearly six years later we have experienced the following:
- Record high housing valuations versus incomes, rents and GDP;
- Record high household debt;
- Record high bank offshore borrowings; and
- Record high investor participation.
The sad truth is that our economic leaders let the dumbest bubble in history inflate to another record high just as national income is falling and the economy is facing significant structural adjustment as the mining boom unwinds and the car industry shutters, largely because they misjudged the durability of the mining boom by several decades. Turnbull is in the thrall of this bubble-management thinking.
This can be contrasted with the Labor platform which has embraced tax concession reform for property and superannuation and is aiming beyond housing to manage the overall macro settings for the economy. With lower than otherwise house prices and a repaired Budget, interest rates and the dollar will fall and Australian competitiveness and productivity will rise, unleashing new and more sustainable forms of income and GDP growth.
The election is now a bare-knuckled fight between bubble managers and economic managers.
