Government policy and wealth transference

For some time now we have been discussing the bizarre policy of the Australian government of incentivising one generation into property speculation to the detriment of another (and ultimately the economy)

As we have said previously.

It would now take the average young person 4.5 years just to a save the deposit for a average crap-shack in the middle of nowhere. Australian couples need to raise $85,800 deposit for a median-priced house, And that is while they are paying rent on a house they are subsidising via tax offsets the government supplies to their landlord.

With that sort of inequitable taxation policy it isn’t hard to imagine there has been a slow migration of wealth to one end of the demographic curve.

Today we note that the Australian Housing and Urban Research Institute has released a new report that clearly demonstrates the effects of this policy.

In this context, the very high housing prices that are currently extant are a major concern. It appears that the benefit of higher household incomes in the benign decade 1998–2007 went into pushing up house prices and debt rather than improving home ownership or increasing the stock of housing. The country that promised limitless land, cheap housing and near-universal home ownership to all comers now has some of the most expensive housing in the world. High house prices act as a drag upon growth and competitiveness, have exaggerated inequities in wealth and intergenerational inequity, and they will eventually increase the welfare burden on the community.

If rises in national income continue to be capitalised into higher house prices rather than being used for beneficial investment, then Australia will eventually have to get used to being a country of lower home ownership than we have been used to. If house prices are to stay high and increase, as seems likely – this would be a considerable drag on the Australian economy, a barrier to competitiveness and livability, and above all, a deterioration of intergenerational equity, amid very tight urban housing and land markets – and little prospect of restoring the balance unless a very comprehensive programme of reform is undertaken.

It is a long report but well worth the read, and makes some very familiar conclusions about where the problems are from.

The report has stated that falling home ownership rates are due to two things—demographic change, and decreased affordability caused by a chronic imbalance between supply and demand. There is little that governments can do about demographic change except to take account of this in their planning decisions. However, we maintain that high prices and decreased affordability have been caused by government policy, and it can be fixed by government policy if the will is there.

The report has a dataset from 1996 to 2006, but nothing has changed recently.

We noticed just the other day while analysing data from AFG on mortgage issuance that the trend continues, if not accelerated. You can see from graph below that investors have almost completely displaced first home buyers, while refinancing and upgraders have stayed relatively stable.

You can also see that even though house prices were increasing during this period the LVRs were falling because investors were proportionally increasing and using existing equity as deposits. ( We will leave our readers to grasp what that actually means, but this post is a hint. )

It is clear that house prices are now so high that unless you already own one it is becoming increasing impossible to enter the market. Yet the government continues to provide tax subsidies to the people who need it least, paid for in-part by the people who need it most.

Just another way housing policy and housing speculation is slowly killing the economy.

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