All political campaigns generate their own examples of economic idiocy and this one in Australia has been no exception. Listening to the radio this morning, though, reminded me of this. I thought I was listening to some hick economic populist – then I realised it was a serious policy announcement from the Opposition.
The announcement was of a tax break for people who have not yet owned a home to create what amounts to a special savings account for the deposit required to buy a home “so that they can get out of the rent trap”.
Looks attractive – sensible policy right? Wrong – and this is wrong on so many levels it is not funny.
- Renting is not a “trap” it is a valid financing decision for a home. If you believe that housing prices are going to drop, particularly over the long term renting is a good idea. Renters in Japan over the last decade, for example, would be laughing at those who borrowed heavily to get into the “joy” of home ownership. The same could happen here, particularly given the high current prices.
- Renting is also very useful if you are only going to be in an area for a few years – if you have the sort of job that moves you around a fair bit then it may be completely inappropriate to buy.
- Giving tax incentives to buy your first home reduces your mobility – your tendency to move to get that next job. The government will help you get that first home, but not the second. In fact the Australian State governments will tax you for doing so – probably taking all the money the Feds dropped in to help you buy it and more. If you are not prepared to move for a job then you are either going to stay where you are or, worse, become involuntarily unemployed.
- Most crucially – the housing affordability “crisis” is not going to be solved by throwing money at it. It is not. The problem out there is not that there is not enough money chasing homes, the problem is that there is not enough housing being built. With prices above record levels in most of Australia there is little or no evidence that more money will solve the problem – in fact the reverse is true. All that more money thrown at the housing market will do is to increase prices further, further reducing affordability.
- Glib, shonky promises like this one give the impression of helping without actually doing so and end up convincing more people that there is something seriously wrong.
There are many more problems, but that is enough to go on with.
If the opposition (or the government) were serious about tackling housing affordability there are a few steps they could take:
- Release more land for building – either green or (better) brownfield land for multi-unit development. This is the one step that will truly tackle land prices.
- Reduce or eliminate taxation on land and building construction and transfers to reduce the costs of moving.
- Do the same for the firms seeking to supply building materials to reduce the costs of those materials.
- Recognise overseas qualifications to improve the labour supply.
- After the others – remove the impediments on lending to people seeking to build or buy a house, such as the 80% LVR restriction.
I would also like to see the development of alternatives to the current means of financing house purchase – such as encouraging the development of Musharakah financing, but this is not an immediate way to reduce prices.
Personally, as a home owner, I am very happy with the situation. I am just glad I got in a few years ago.
15 comments
5 November, 2007 at 11:16 am
Amir
In addition to your first point, what about relaxing or removing planning restrictions? For example, height restrictions.
5 November, 2007 at 12:30 pm
Andrew
Amir,
I agree – in a way this is a method of releasing air for housing development. Much better than warming the air up and then releasing that in the form of useless words.
5 November, 2007 at 12:30 pm
Jennifer
The main issue making housing unaffordable is the tax benefits you get for owning it – capital gains tax exemptions, negative gearing for investors etc etc. Impossible, politically, to reverse, given that the majority of voters are home owners.
5 November, 2007 at 1:12 pm
Amir
Jennifer: Those things may affect demand but ultimately the problem is that supply is artificially limited by planning restrictions. The only real way to solve the problem is to increase supply.
6 November, 2007 at 11:06 am
Steve Edney
As a renter, I always laugh at the people who think it is some kind of trap. I’ve done the numbers and there is no doubt I have been better off over the last 4 year renting and investing in shares rather than the sydney property market.
At the time you had rental yields at historic lows, and PE ratios also very low. Seemed obvious to pay the low yield and receive the high yield asset.
6 November, 2007 at 11:09 am
Steve Edney
There is no doubt that the tax benefits push the price level up by making it a better investment than it otherwise would be. Decreasing the tax benefits wouldn’t effect the housing shortage, people still want places to live, but it would effect the price level as it would make it a much worse investment and returns lower.
6 November, 2007 at 11:55 am
André Levy
I’m sorry, Andrew, once again I’ll endeavor to add value by being blunt. Your analysis is completely misguided. Poor housing affordability in Australia is hardly a matter of supply and demand for dwelling. Do you see lots of homeless people around where you live, as you would in India or Latin America? Are there people living in squashed environments because of lack of space, as in Tokyo? So, how can relaxing planning restrictions make any difference, other than transforming Australian cities into the likes of Hong Kong and Sao Paulo.
The problem with housing affordability is one of supply and demand for money. According to the RBA, broad money (M3 + private borrowing) has been increasing at 15-17% a year in Australia (www.rba.gov.au/Statistics/table_3_311007.xls), while GDP growth is around 3.2%. The result? Asset inflation! Housing prices have not been going up because of limited supply due to planning restrictions and lack of government subsidy, as the builders amongst us would like us to believe. House prices have gone up with all other assets: stocks, boats, art…
And what’s the problem with that? The problem with inflation, Andrew, is that it syphons wealth from those that hold cash to those that hold assets, i.e. from labour to capital. It’s then no surprise that you’re happy to own assets under these circumstances. I am too.
However, pertinent to a blog on risk management, we should not fail to see the risks in what we are doing. In the last 30 years, credit in Australia has gone from 25 to over 150% of GDP! And household credit accounted for 85% of that increase!! ((http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html)
Something has to give, no? Steven Keen, from UWS sure thinks so:
http://www.debtdeflation.com/blogs/wp-content/uploads/2007/10/KeenMonetaryModelFinancialInstability.ppt
6 November, 2007 at 12:09 pm
André Levy
Steve, rental yields will be lower than company earnings yield for as long as the access to credit, and thus leverage, is easier and broader for housing than it is for stock investments. I, like you, am also a happy renter. Sure you got better yield, but were you able to leverage as much as with a mortgage? Would you rather earn 5% on a million or 20% on a hundred thousand?
6 November, 2007 at 12:25 pm
Steve Edney
Andre I realise they will always be tend to be lower, but recently they are much lower.
Leverage of course works both ways, and property markets move both ways. In this specific sydney housing vs ASX example I would rather 120% on 100K than -10% on 1 million.
6 November, 2007 at 4:36 pm
Andrew
André,
I would agree that the stock of housing in Australia is not deficient, in that there are no (or very few) homeless people on the street. I would also agree on the increase in credit (although my agreement is irrelevant – it is a fact).
The question then is why this has not fed through into consumer price inflation.
To me, the several of the possible answers are:
1. Consumer are being held down by the increased availability of cheaper goods and services, partially at least due to cheaper imports due to better ports, Chinese and Indian productivity, etc.;
2. There is a large amount of substitution going on, with the bulk of the population content to put their money into longer term assets, such as housing, and are comfortable to borrow to do this, confident that the inflation genie has been well and truly bottled;
3. The inflation measure we are using is simply wrong an should include asset prices; or
4. The measure we are using of money is simply wrong.
IMHO it is actually a combination of all of these and possibly more factors. The question for the RBA, then, is what to do.
I think that it is fairly clear that adding asset price inflation into the calculation of general inflation would reduce growth – particularly if it was phased in quickly. Would it actually achieve anything?
7 November, 2007 at 3:28 pm
André
Andrew,
Can I take my pick? I’ll take (1) and partly (3).
(1) Other than availability of cheaper labour overseas, consumer prices have been subsidised by an artificially devalued yuan. Instead of allowing consumption goods to deflate, raising the standard of living of all, and proportionately more of those who own less, the Fed relaxed monetary policy and allowed the inflation to seep into asset prices, first to the stock market, than to real estate, then private equity, then the stock market again… Central banks mostly everywhere else, other than China of course, could only follow suit. Either that, or risk loosing the customer.
And who can blame the central bankers? If they allowed consumption goods to deflate, their citizens consumption behaviours would become worse than they already are, and risk facing a hard fall once the yuan gets revalued. The trouble is that, by relaxing monetary policy, in essence allowing the dollar to devalue at pace with consumer prices, caused asset prices to skyrocket, creating asset bubbles everywhere, and a ballooning credit bubble to finance it. As a result, with inflated home equity values, people took on second mortgages, and went on a spending spree with their new apparent wealth.
The king is nude! Do you ever remember anyone spending $5,000 on a TV 20-30 years ago? Even less so, if you correct for consumer price inflation. Yes, LCD/Plasma TVs are a lot more impressive that the old CRT, but the TVs back then has their own innovations for the time (wireless remote? wow!). The bottom line is that we are spending far beyond our means simply because we’re leveraged on a asset bubble caused by depreciating government currency, while consumer goods are subsidised by a undervalued yuan. What if one day the chinese find that they rich enough to consume their own production? The yuan gets revalued, CPIs across the western world will register a major blip, import of final and intermediary goods as well as production equipment will become prohibitively expensive, economic activity will drop… until we find something we can sell to the Chinese.
(3) Agreed in part. Depends what’s used for. We should have a measure of asset inflation. In fact, we do. It’s gold. Have a look at the price series. The price of gold goes up when all currencies go up against the US dollar, and goes down when the yankee dollar is stronger. Yet, for the arguments used above, it’s useful to distinguish between consumer price inflation from asset inflation.
7 November, 2007 at 10:27 pm
Andrew
André,
That comparison cuts both ways – I remember my father spending over $8,000 on a computer in 1985 that would be a laughing stock now. The DVD players, VCRs (if you can find them) and many other pieces of kit are now much cheaper.
On the China argument – true for the US, less true for here as Australia is one of the few countries running a trade surplus with them.
The AUD has also been largely steady against gold for many years – with the disconnect coming more recently. It is also arguable if this is truly steady recently, as it could actually be a demand shock, in common with other commodity metals.
8 November, 2007 at 10:36 am
André
Good point on the computer argument, Andrew. I also agree Aussies are in a much better position than the Yankees. The economy is making a bundle out of handing over crude metal to the Chinese. And so are the Brazilians, who are also their largest supplier of soybeans. The difference is that we are 20m in this island, and the Brazilians are nearing 200m!
Yet, even with a trade surplus, the economy is growing at not much more than 3% and the amount of currency at 15-17%. See, the Chinese don’t even have to revalue the yuan to turn all this around. Is it the dog that wags the tail, or the tail that wags the dog? If the Chinese simply stop rolling over the +$1t they hold in US debt, long-term USD interest rates will skyrocket, and the currency will plummet. Other creditors of the US treasury, i.e energy producing countries, yen-carry traders, and Japan, will have no option but to follow suit. In attempting to prevent a massive currency evasion, and in trying to stifle a quantum leap on the CPI, the Fed will raise the short-term rate too. Other countries wishing to prevent a similar currency evasion into a higher yielding USD will also be forced to level up their yield curves. Rather than revaluing their own currency, the Chinese will simply devalue everyone else’s.
On the other point, I’m not so sure the demand for gold is anyhow related to the demand for the remaining metals, other than silver. See, gold is useless. The only advantage of gold is that it can’t be created and it can’t be destroyed. Nothing can be made to transform into gold, after many numerous futile efforts throughout history, nor can gold be transformed into anything else. There, it’s unmanipulatable. That’s why, in a world of evanescent currency, gold is at a premium.
8 November, 2007 at 3:18 pm
Andrew
André,
The point I would like to make is that the total of M3 is rising at 15-17% – but is the amount of “money”? How much relevance does the measures of money we have used up until now have? For example, I know that i am now more willing to hold cash on me that I was several years ago – the low cost of having inactive balances may be causing an increased demand for money for holding rather than money for transaction purposes.
To me, we like to be able to measure it, because that way we feel we can control it, but can we?
On gold, it does have several uses – there is a fair bit in the computer you are reading this on, and in most other electronic equipment. It is also heavily used for jewellery – and both electronics and jewellery are very popular at the moment.
26 November, 2007 at 10:21 am
Chui
House prices have gone up in Australia because of two reasons:
1) House prices have gone up. So people who can hang on to their existing property will do so, reducing the supply of available houses for sale.
2) Availability of credit. Willingness to pay aside, the maximum price of a house depends on what people are actually capable of paying. If you look at primitive societies where banks do not exist, you would not find housing priced at 20 times annual earnings.