The Reserve of Australia (RBA) assistant governor, Christopher Kent, has injected some good sense into the housing debate, arguing that Australia’s affordability woes are primarily home grown, rather than caused by foreign investment. From The AFR:
…arduous planning processes, a lack of land and residents unwilling to accept higher-density housing in their neighbourhoods contribute to a housing undersupply, forcing up prices.
Low interest rates have fuelled a local buy up, which has also raised prices.
Kent also noted that a lack of data from the Foreign Investment Review Board (FIRB) has made analysing the impact of foreign purchases inherently difficult.
I broadly concur with Kent’s assessment and place the blame for Australia’s exorbitant housing costs squarely on Australia’s housing quango, whereby policy has conspired to pump demand and choke supply.
Specifically, Australia’s tax system makes investment into housing a relatively attractive proposition via a combination of high tax rates on savings, as well as tax generous concessions like negative gearing and capital gains tax discounts. As a result, demand for housing is higher than it otherwise would be, resulting in too much of the nation’s capital being tied-up in housing, chocking-off productive areas of the economy.
Anyone questioning this proposition only needs to examine at the proportion of loans taken up by investors, which has surged over the past 20 years, in line with Australian house prices (see next chart).
Or the overall explosion of property investment, most of which is negatively geared:
At the same time, a myriad of constraints on housing supply such as urban consolidation policies, cumbersome planning approval processes, and high taxes and charges on new homes have forced-up the costs of development, impeding the market’s ability to supply affordable housing and significantly dampening the supply response, despite rocketing prices and strong population growth (see below charts).
That said, while it is government policy, beyond anything else, that is the primary cause of Australia’s housing malaise, foreign purchases are certainly adding to demand, pouring more fuel on the housing bonfire.
While official data is dodgy, as noted by the ABS, real estate agents, and industry professionals, unofficial survey data from NAB suggests that foreigners are contributing nearly 10% of demand for pre-existing dwellings – not the major driver but certainly significant:
As an aside, while Kent has himself made some sensible comments on supply, it should also be noted that the RBA has been making contradictory noises on this issue over the past year, on several occasions playing down the role of inflated land prices and planning constraints in making Australian housing unaffordable (see here, here, and here). It has also offered up cherry-picked analysis of other markets that concludes more responsive housing supply decreases financial stability.
More consistency from within the RBA certainly wouldn’t go astray.
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