Business Spectator’s Callam Pickering has posted a cracking article today lamenting Australia’s sky high house prices, which have been caused by and large by an epic failure of policy on both the demand and supply sides:
The current predicament — high prices and elevated indebtedness — is completely intentional. The fault lies with our major banks, the RBA and government policies…
…banks in Australia routinely lend two or three times as much to couples who need support from their parents simply to make the deposit.
Banks have gone all in on mortgages and face massive losses in the case of a prolonged housing slump.
…the government weighs in with a variety of policies that promote speculation at the expense of home ownership. Negative gearing and capital gains concessions make housing an increasingly attractive investment. While the first home buyer grant creates the illusion of affordability for young Australians when in reality it simply redistributes funds towards the wealthy.
State governments help to keep prices high by limiting the land released for development. High house prices lead to more stamp duty and that is a major source of state revenue…
The RBA’s main fault is one of inactivity… The RBA has a range of tools available to slow the housing market and encourage banks to redirect their credit towards the business sector but have instead decided to do nothing…
The only thing ‘different’ about Australian housing is the loose lending standards and poor policy that underwrite it.
I couldn’t have said it better myself. In just a few hundred words, Callam has summarised everything that is wrong with Australia’s housing system.
What makes the situation worse is that the two major political parties remain cheerleaders for the status quo, supporting policies that push housing costs higher, to the detriment of younger and future Australians.
For example, Prime Minister Abbott last year 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”.
And who can forget Treasurer Hockey’s interview on CNBC late last year when he abandoned the notion of free markets and instead supported a housing quango of pumping demand and choking supply.
It is for these reasons that despite all the talk of ‘ending the age of entitlement’ and a ‘Budget emergency’, the Government has failed to put reform of negative gearing on the table, despite overwhelming evidence that it is harmful. It also helps to explain why the federal government continues to run a high immigration policy while letting state governments continue to strangle supply in order to support house prices; or using Hockey’s own words: “to manage the market”.
Unfortunately, there is little likelihood of genuine housing reform, especially while baby boomers are effectively in charge of the political process. There is no way that they will endorse policies that place at risk their unearned housing wealth, even if it would be in the best interests of their children, grandchildren, and the longer-term health of the productive economy.
On this point, it is well worth reading the below diatribe from the Bank of New Zealand’s chief economist, Tony Alexander, explaining why baby boomers will not let fundamental reform of New Zealand’s housing market happen. While it is obviously written for a New Zealand audience, it could equally be extended to Australia’s housing market, which shares many similarities and effectively has the same banking system. Warning: if you are a young person, it is certain to make your blood boil.
There is talk that the Reserve Bank could consider putting extra credit controls in place in order to try and stem inflation sourced from the housing market. The new restrictions could take the form of limiting how much someone could borrow to a multiple of their household income. In this way people would not be able to borrow as much as they can now therefore upward pressure on prices would be less than would otherwise be the case. If the restrictions were harsh enough house prices could even be pushed lower, though that is not highly likely given that the overwhelming impact of credit restrictions will be felt by the group of people who have already been shut out of the market to a big degree by the maximum loan to value rules – young first home buyers.
Is this something about which we in the lower, middle, and upper middle classes, and those silly enough to self-identify in New Zealand as in the upper classes, will feel greatly worried about? Heck no. We have already bought lots of investment properties over the past few years and keep hearing stories about how rents are lower than they should be. We are wary of raising our rents because to do so to a large degree would make us look like pricks – be “up ourselves” in the Kiwi vernacular – and that is something one has to assiduously avoid in this country.
But if it becomes even harder for young people to buy a house then they will have to rent for longer, so it will start to become more socially acceptable to raise rents. So we will, and while we will tut tut about how difficult it is for a young person to buy a property these days our incomes will rise and we will, yet again, feel happy that we ignored the many doomsters and kept buying properties the past two decades.
And just in case you are starting to feel insulted by these comments, it gets worse. You see the bulk of us with money and owning houses probably live in a reasonable one already. The last thing we want is more houses and noisy people living closer to us. After all, if we are here in New Zealand by choice we are here for lifestyle rather than income, and a key part of that lifestyle is not living cheek by jowl with other folk if at all possible.
So again, we will tut tut about how hard it is for young people to buy a house and how difficult it is to get a resource consent, a building consent, find a builder, get council inspectors out, manage contractors and so on. But we will not as a rule strongly support measures which either increase the pace at which houses can be built, decrease the cost of doing so, or allow more houses to be squeezed into any given area. Unless maybe that area is a CBD in which we think the developers can go for it because after all, while the CBDs have more restaurants than years ago, they do look less and less like the New Zealand ethnicity mix we remember from our early days, so who cares what number and size of apartments get crammed in there.
In New Zealand it is politically correct to express concern about the high level of house prices. But the next time you have a discussion with someone on the subject, dig, dig, and dig and the chances are you will both end up admitting that you have done well out of property and question why would you want extra supply putting your rental income and accrued capital gains at risk.
Sorry young folk, but much as you may feel the future belongs to you and your smartphone tapping ways, for now the wealth and the power belongs to us – the Baby Boomers. And you my dears form part of our retirement packages. So don’t expect any of the radical suggestions which I have thrown into this section of the Weekly Overview every now and then for solving the housing affordability crisis to actually gain traction.
I wrote this article on Friday then on Sunday saw this headline in the Sunday Star Times “Rich People Blocking Housing Growth”. Labour, the Maori and United Parties prevented a government bill passing recently which would have reformed parts of the Resource Management Act and made it easier for new houses to be built.