Turnbull’s housing affordability plan: blame the unions

By Leith van Onselen

With zero mention of housing affordability in the Federal Budget, Prime Minister Malcolm Turnbull has found his scapegoat: Australia’s building unions.

That’s right, in the above election ad, Turnbull suggests that cracking down on union corruption is a way of improving housing affordability:

“We’re paying up to 30 per cent more for hospitals, schools and roads. Even housing affordability is affected because of the high cost of building apartments”…

So Turnbull won’t address the fact that hyper-investor speculation has directly crowded-out first home buyers (note the inverse correlation below):

ScreenHunter_12879 May. 09 15.19

Or that most of the cost appreciation has been in the land, not the structure component:

2
ScreenHunter_12880 May. 09 15.25

No, he has instead pinned the blame for Australia’s atrocious housing affordability on the unions. Convenient, hey?

When you think about it, there are two broad approaches at Turnbull’s disposal to make homes more affordable for younger Australians:

  1. Remove artificial (speculative) demand from the market; and/or
  2. Introduce measures that improve the supply of affordable land/housing.

Unfortunately on the demand side, Turnbull has opposed Labor’s sensible reforms to Australia’s negative gearing and capital gains tax system, despite describing them as “tax shelters” and “tax avoidance” in 2005.

So this leaves the supply-side.

If Turnbull was serious about housing affordability he would offer incentive payments to the states to free-up land supply, relax planning, and build housing-related infrastructure. It is the federal government, after all, that has decided to run a high immigration program, so the least it can do is provide the states – the ones primarily responsible for service delivery and infrastructure – with the means to cope with this growth.

Given the massive vertical fiscal imbalances present in the federal system, it is not surprising that the states have attempted to prevent growth of the urban footprint in a bid to save on infrastructure costs. Accordingly, the best way to overcome the states’ reluctance is to ‘show them the money’ and offer them incentive payments in return for genuine supply-side reforms.

Most importantly, the “First-User-Pays-All Model” used to fund housing-related infrastructure must go. As explained by regular MB reader, Pfh007, the First-User-Pays-All Model works as follows:

  1. Developers are forced to provide the long lasting housing infrastructure, that largely benefits the entire community;
  2. Developers then dump almost the entire cost on the first user of the land (usually a first home buyer), who then tries to pay for it with a jumbo-sized mortgage, much of which our banks borrow offshore;
  3. Local and state councils are then motivated to try to load as much expense on the home buyer as possible, and often also whack on a nice assortment of fat levies and contributions as well;
  4. The end result is a system that encourages gold plating and over charging when bringing land to market and forces the most vulnerable and less financially secure people pay the cost with hundreds of billions of foreign debt that requires a taxpayer guarantee.

The First-User-Pays-All Model is a key reason why fringe lot values have experienced hyper-inflation over the past 15 years. It is also why first home buyers are being gouged circa $600,000 to live in a basic 3 bedroom house 50 kms from Sydney and why there is almost no-demand for expensive new housing like this unless interest rates stay close to zero.

Again, as explained by Pfh007 (here and here), instead of the First User Pays All model for financing development costs, a much smarter solution is for the federal government to pay the servicing and development costs of bringing the land to market and then recover part or all of the cost from rates or taxes on the land over the next 20-30 years .

The commonwealth can do it directly via a Commonwealth Land Tax (which existed between 1910 until 1953) or have the state government collect it as rates and remit the required amount back to the federal government (or bond holder).

Again, the reason why the federal government should lead the way and fund housing-related infrastructure is because it controls population growth via its control of migration, and because the federal government can borrow at lower cost than the home buyer or the state governments.

If Malcolm Turnbull remains reluctant to fund such vital infrastructure, the federal government could instead set up a Municipal Utility bond model (explained here and here), like the one operating in Houston Texas, and then let the growing self-managed superannuation fund (SMSF) sector do the funding. The returns will be secure if the rates/taxes are a first charge on the property, and the SMSF industry is begging for simple secure long term investments that generate a steady return. In any event, the model certainly beats the current one whereby SMSFs are having a punt with retirement savings on the housing bubble.

None of these solutions are rocket science. But it will take genuine leadership from Malcolm Turnbull to achieve genuine supply-side reform, not lazy lip service blaming the unions.

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Unconventional Economist
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Comments

  1. Really? Turnbull?

    If workers were cheaper, the developers won’t just pocket the savings? The buyers seems don’t mind paying anything for dog boxes.

    • Kevin, don’t you see, people on lower wages will find that housing is more affordable because their labour is cheaper…..oh, hang on….

  2. Nothing will change until the depression hits, nor should it. Reform will only be meaningful when governments are desperate.

    • I think you have a good point. In a country where people believe that refugees are taking away our jerbs and cause traffic jams, the Libs have a good chance of convincing older voters that construction unions are the reason for high apartment prices!

      But I wish enough young people vote for Labor/Greens/Ind and a Labor coalition comes to power – we definitely need the Royal Commission into Banking before SHTF.

      • Actually even bogan voters now know that 457 visa workers are the cause of overcrowded hospitals and trains. Not boat people (the boats have stopped coming over so now the bogans are a bit more aware).

        But yes even in 2010 I saw on ABC a bogan who thought that the traffic jams are caused by refugees!

      • Turnbull deserves to WIN this election, so he can enjoy all of the ‘spoils’ of victory. Especially the economic disaster he and his neocons have engineered.

      • I’m voting Libs second in the lower house (after an irrelevant party that won’t win so the Libs don’t get any AEC money), and DEAD LAST in the senate; after even the loony parties.

        A lame LNP government is required in order to wear the imminent once in a century downturn. If Labor get in and it collapses, Australians will blame their reforms (no matter how small) and reverse them.

      • My thinking is based on stopping bank bailouts/bail-in and the resultant can kicking that will postpone your once-in-a-century bust. Libs will most definitely bail them out. Labor and the RBA/APRA will have some trouble bailing them out while the RC is simultaneously digging up dirt about the banks.

      • “…and DEAD LAST in the senate…”

        No need to vote for them all in the Senate under the new system. Just number 1-6 parties above the line (even just 1 is still valid) or 1-12 candidates below the line (6 or more is valid).

      • Sorry Lord Dudley but voting for the Coalition as some way of hoping they will take the blame for a crash is just epically stupid.

        When the crash comes, as it will, I don’t want those fuckwits anywhere near the cleanup operation for the sake of the most vulnerable in our society.

        All you will do is give them more belief in what they are doing, even after the crash.

      • “When the crash comes, as it will, I don’t want those fuckwits anywhere near the cleanup operation for the sake of the most vulnerable in our society.”

        Yeah, but whoever is in when/if house prices crash will be voted out at the following election. They will be in the political wildness for at least a decade. As one of the working poor, who suffered for 11 (felt like 20) years under Howard, I’d rather see the Coalition in exile than Labor. That’s not to suggest i like Labor, i don’t, but the Howard government found some pretty weird and wonderful ways to make people like me suffer.

        That said, it is possible that Australia will join the great global stagnation and yet somehow avoid a property crash. It seems unlikely, but you can’t discount the possibility. In which case we’ll probably see more of the same. We’ll just change governments are few years and slowly get dragged into the abyss.

    • As painful as it will be, I really hope after the bubble implodes that we can have a mature debate about the causes. Debates we have on here everyday. However I remain very worried that if Labor wins the election and negative gearing changes (or other reforms) help prick that the bubble that the Coalition will have all the ammunition it needs to completely muddy the debate and future reforms. This really needs to happen on the Coalitions watch. They’re no more to blame than Labor, but I think they’re more likely to stand in the way of genuine reform. They need to go down with the ship/housing bubble.

    • and the desperation of government only comes from the fear of bloody revolution in which they have high chance of being executed

      Libs deserve to see collapse of their neoliberal project under their watch. Labor deserves it as well but in two party system it’s impossible to have a cake and eat it.

    • Reform depends on who is in power. If it was the LNP, they would use the crisis to reform their ideological items. They would reform (I.e. Privatise) Medicare, education, and social security. They would then just give money to mates under the cover of stimulus and trickle down economics.

      • True, but reforms be undone. If house prices collapse too soon after Labor’s negative gearing changes it’s pretty certain that the Coaliton wins the next few elections, does the things you mention, and brings back negative gearing, and much worse!!

    • Agreed – we would have been much better` off if the whole thing had died in the GFC and we had taken our medicine then. Rudd was a complete idiot

      The bigger she go the further she fall. Now she get too big to fail. Gonna be very nasty, get ready for the 30 year recession.
      .

    • Today's Empire Tomorrow's Ashes

      Because that works in sh%tty third world countries in depression.

      Depression != reform (necessarily)

  3. ceteris paribus

    Yes, indeed, it is logically hard to blame the unions when the escalating unaffordability is overwhelmingly generated by the land component rather than residential construction. I suppose the logic is that, if you have a devil, you might as well whip it for all ill fortune.

    • Many builders using 457 visa holders (think Irish etc) and paying cash in hand well under award rates. These labourers then partying furiously,not saving at all-no wonder bars and clubs doing well. heard from local builder.

  4. proofreadersMEMBER

    “But it will take genuine leadership from Malcolm Turnbull to achieve genuine supply-side reform … ” – that’s way beyond him?

    • It would take Malcolm expanding his circle of competence beyond being a mouthy spiv.

    • This recent newsletter from the Dallas Federal Reserve is also worth reading … where Dr James Gaines, the Chief Economist of the Texas Real Estate Center is interviewed .., ‘A conversation with James Gaines’ …

      http://www.dallasfed.org/assets/documents/research/swe/2016/swe1601c.pdf

      These bond infrastructure financing systems (the Texas ones are the most refined) should have been in place here in Australia and New Zealand years ago … indeed decades ago.

      Why hasn’t this already happened in Australia and New Zealand ?

      It is hardly rocket science.

  5. labour construction cost (excluding material but including management cost and developers profit) is under 10% of final price for Sydney inner city houses, under 20% for inner city units and around 15% for suburban houses.

    Even if labour is free houses wouldn’t be any cheaper.

  6. ErmingtonPlumbingMEMBER

    The most laughable thing about Turnbulls claim is that Unionised labour is just not used to construct the vast majority residential housing, they, like me are all sub contractors or nonunion labor.

    Even though im an owner operator (pty ltd) im still in the union out of principal and have contact with over a dozen former colleagues who still work in the Unionised construction sector and I can tell you that it is on only the lagest projects (hospitals, towers over 15-20 stories) that a union work fotce even exists!

    Let me be clear, Your new house or appartment was NOT built by Union Workers.

    Either way,… the developer charges the fullest price the market can bear irrespective of labor or material costs

    • DodgydamoMEMBER

      I was going yo make this point also, although I disagree on the scale of project before a unionised force applies. Certainly all detached housing is non-Union. In fact one of the reasons we don’t get the ‘goldilocks’ scale of medium density apartment development is because those sites become unionised and the cost goes up, requiring more units on the site.
      Further, in my experience on commercial sites it appears union pier has been somewhat diminished by imported labour, I haven’t seen an Anglo putting up plasterboard partitions for years, seems the Chinese have that gig now.

    • Not only that EP but the developers take 10 – 20%+ off the top of each trade’s billable charged to the home owner, that’s not counting forcing them to eat variances.

      Disheveled Marsupial…. talking about supply and demand without a forensic examination of every stage of the process is not an accurate depiction of reality…

    • As someone who has just moved into a new house (built by a major NSW home builder), I can absolutely confirm this.

      It gets worse however. Most of the “trades” are not being performed by qualified tradespeople.

      The guys laying the tiles were non-English-speaking Vietnamese. I actually saw one of them hand over cash to the site supervisor. I wonder what that was for?

      The”bricklayers” did such a poor job in some places that we insisted the work be rectified. The builder agreed, but called in a different guy to rectify the problems because he was terrified he would piss off his bricklayers as they are so hard to attract and retain.

      It was apparent that even some of the most important trades were being performed by unqualified or partly qualified people and then signed off by a licensed tradesman at the end. We have had some serious issues with plumbing and drainage as a result (blocked sewer line, sewer gas leaking from an incorrectly connected toilet suite etc.). A friend who has been a plumber for 40 years confirms that he misses out on plumbing contracts because he “is too expensive” but when the successful contractor stuffs up the job or doesn’t finish it he is asked to sign it off. He refuses.

      I had to re-paint my front door because it was done so poorly – I’m no painter but with a little care, attention and patience it is a 100% improvement over the job the “painter” (another non-English-speaking Vietnamese) could manage.

      And don’t get me started on issues with the landscaping!

      My wife’s cousin has been a builder for over 40 years and until recently was a site supervisor for one of the larger home builders. He has just quit (and is now self-employed) because his company employed rubbish trades and he was left to clean up their mess and deal with the disgruntled client.

      I can’t comment on whether unionised labour and trades are likely to do better work than non-union labour and trades. But at least you can be sure that the people doing the work are actually qualified!

      • It started around 95 when financial institutions were scaling up development and become the driving agency in the entire industry, from materials to tradesmen, they drove events both private and public sectors. The actual building mobs kept screwing down quality [in all aspects] to drive sales and margins, to the point most old school construction bosses punched out [along with their skilled tradesmen they vetted over long periods of interaction] and replaced with malleable sorts and MBS’s. Now its 10 or 15 apprentices to one journeyman and master tradesmen are as rare as hens teeth [mostly sole proprietors doing high end work for the well heeled].

        Actually this is a model which started off in the 80s in America and has been doing the rounds globally, it just was our turn, like with redevelopment of of intercity blight. In Brisbane that would be the woodsheds and other past industrial sites, started by the Canadian that came over with his inheritance and that one guy that owned most of the derelict buildings in the CBD ring. Wait for the tide of international capital flows and then presto, demolish, set up temp parking, build and then consolidate parking.

        Disheveled Marsupial…. the rub here is the Financial mobs drive – choose – force these outcomes with forethought and intent…

      • “A friend who has been a plumber for 40 years confirms that he misses out on plumbing contracts because he “is too expensive” but when the successful contractor stuffs up the job or doesn’t finish it he is asked to sign it off”

        Oh too familiar. My local plumber, good bloke, has been in the game for 40 years. I’m in some 1980’s Len Buckeridge place and the cold water mains had 5 underground leaks in the space of two years. It was c cheap poly that had come to the end of its life.

        “Steve, what piping do you have in your place?”

        “Copper, only copper”

        I got the whole thing replaced with copper.

        He’s close to retiring but his son in now placed to overtake the business. Steve said he has inherited gold. There are 4 new estates in my area, and all 4 of them deliver a constant flow of major repairs to the business.

        He was talking things like mains are now poly piped being fed through the roof and between the double brick cavities. They’re not even tied down and the poly is so thin that Rats can smell the water.

        Now, imagine you put rat sack to kill them, what’s the rat going to do. He sees major leaks in roofs once per week.

        As I said, his son has his W.I.P for the next 20 years as an inheritance.

      • So rusty all the fraud that front loads the problem is OK in your book and as such the plummers kid expectation of fix it for profit, at the cost of the buyers, long after the looters are gone is anything rational to you?

        Disheveled Marsupial…. hope your not in charge of any critical systems mate….

      • “So rusty all the fraud that front loads the problem is OK in your book and as such the plummers kid expectation of fix it for profit, at the cost of the buyers, long after the looters are gone is anything rational to you?”

        Yeah, that’s exactly what I’m saying.

        Dickhead.

      • Seems fraud is your friend Rusty… wait till your in dire need of health or other critical services and fraud takes away your freedoms….

        Dishevels Marsupial…. in a thread about endemic and fraudulent abuse all you can think of is feasting…. upon it…. that makes you a wanker… I’ll take dickhead over that any day…..

  7. When the inherent problem is a form of “monopoly rent” in urban land, urban land cost is a “slack variable” and it does not matter how much tighter or cheaper or smaller or higher you build, the resulting houses will be just as unaffordable as ever. People merely get worse housing, and the land rentiers gain more.

  8. Land Tax got a good run on Q&A last night. Surprise supporter in the CEO of AIG.

    A hung parliament is the best result we can hope for if the objective is fair and workable tax and transfer system.

      • Wellie that’s how the ride in Texas…. had we taxed all those financial transactions that blew up in the GFC, it might have not happened at all or at least in could have been shoved down the markets gob like the LTCM debacle….

        Disheveled Marsupial….. but nooooooo…. free markets baby aka neoliberalism….

  9. Turnbull has nailed it.

    Houses are unaffordable because of unions and high house prices need to be protected because they’re the only way the heavily unionised teachers, nurses and policeman officers can get ahead.

  10. Yep, it’s the fault of the unions that for the last 17 years house price hyperinflation has been leaving wages in the dust
    Now we are expected to rely on the charity of developers passing any construction cost savings to home buyers, just like the landlords allegedly pass on negative gearing to their renters out of the goodness of their hearts,,,,

    The Member For Wentworth has jumped the shark one too many times.

  11. surflessMEMBER

    To be honest, as a QC you need to put forward a convincing argument on points of law to win your case, when did Malcolm Turnbull loose that ability in that bad ad.

  12. Abc fact check should look at this . It’s all getting a bit pathetic. Odwyer on q&a was classic. Actually thought one of the better episodes in a while.

  13. Torchwood1979

    Bringing back the ABCC will cause the COST OF HOUSING TO FALL. It will hurt MUM AND DAD INVESTORS. Even if the cost reduction is only 2% of the VALUE OF THE FAMILY HOME that can be 10 or 20 thousand dollars!!!!!!!!!

    This is a terrible Labor policy, because Labor wants the value of housing to fall and they hate MUM AND DAD INVESTORS.

    So I’m voting Liberal because they believe in a strong economy underpinned by maintaining equity in housing.

  14. I’m not hearing many ‘Malcolm should start his own party’ calls these days.

  15. Very nice piece, succinctly nails it. Great discussion too.

    If that graph is anything to go by, we are starting the next leg up of the land Ponzi. I would have to call a Buy. This should be fun.

  16. The supply side information in the article here is very interesting. Thanks for that.

    Sadly, it does feel like our Federation system will inevitably mean that nothing is ever solved on this.

  17. Jumping jack flash

    Oh how clever Malcolm, unions = Labor, therefore, the high price of houses… is because of Labor!!
    “How dare they, those bastards!” the people cry.
    Like a magician, Mal, well done: “Hey, look over there”… *runs off*

    Nothing at all to do with banks using housing as an easy way to sell and generate cheap debt perpetually to all get filthy rich, and lobbying the government du jour to pave their way or turn blind eyes as appropriate.