As noted by Houses and Holes earlier today, Federal Treasurer, Joe Hockey, gave an interview on CNBC in New York in which he defended claims that Australian housing is a bubble with the below response:
“A lot of commentators, particularly over here [the US], don’t understand the Australian housing market. The fact is, we have a very generous immigration program. And we have very slow supply coming in to the market. Now rising house prices in Australia help to make some of the more marginal new housing developments affordable and realistic and deliverable. And in turn, that increase in supply helps to manage the market. So, Australia is a long way from a bubble…
A lot of Australians put a lot of new capital into their homes – renovate their homes, upgrade their homes – and we have the largest homes on average perhaps in the Western World, and the world more generally. So it’s a very different asset class in Australia than in other jurisdictions”.
What is most astonishing is the first paragraph of Hockey’s transcript. Here we have a Liberal Treasurer, who is supposed to believe in and advocate free markets, effectively endorsing a quango.
What Hockey has effectively said is that the Government will continue to run a high immigration policy and let state governments continue to strangle supply in order to support house prices; or using Hockey’s own words: “to manage the market”.
While I am obviously disappointed in Hockey’s comments, and the Government’s complete lack of acknowledgement of problems in housing policy or commitment to reform, I should not be surprised. After all, just last month Prime Minister Abbott explicitly endorsed higher house prices and the “wealth effect” it bestows on home owners:
“Don’t forget … if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset”.
What is lost in all of this is that the well trodden Australian policy of pumping demand and choking supply has a particularly detrimental impact on younger (and future) Australians that are forced to dedicate a far larger proportion of their lifetime’s earnings on housing than they should. High land prices also adversely impacts the construction sector, whose output has barely increased over the past 30 years, despite the massive increase in the Australian population. The productive economy also suffers through higher input costs (e.g. rents), as well as less access to finance, which is instead channelled into housing as buyers chase prices higher.
Economic theory and international evidence also shows that unresponsive (inelastic) housing supply tends to increase volatility by making prices more sensitive to changes in demand. As such, the policy of supply repression, advocated by Hockey, heightens the probability that the housing market and economy could experience a painful correction in the event that Australia experienced an economic shock.
Overall, this is a poor effort by Hockey and unbecoming of a Liberal Treasurer, who is supposed to advocate free markets and opportunity over political manipulation.