We know how to lower home prices, but our political leaders won’t have it

In what could only be described as good news for first home buyers, the International Monetary Fund is warning that house prices in Australia could fall sharply in coming years. But in good news for those who already own a home, and who are banking on some nice tax-free capital gain, the policies proposed by the IMF to make housing more affordable have virtually no chance of becoming law in Australia any time soon.

Welcome to the topsy-turvy land of Australian housing policy, a land in which our leaders simultaneously pretend they want houses to be “more affordable” for those who don’t yet own them while reassuring those who own one or more houses that we want to “protect the value of their assets”. Talk about having a bet each way.

A simple question for politicians: do you want home prices to rise or fall? The answer is complicated – and usually involves the word “affordable”.Credit: Natalie Boog

The confusion is no accident. It protects governments and oppositions from having to answer the simple question: “Do you want house prices to keep rising or do you think it would be better if they fell?” As it’s impossible to simultaneously please the third of the population which does not own a home and the two-thirds that does, the default politician response is to avoid this simple question with a complicated answer about “housing affordability”, a concept that owes everything to politics and nothing to economics.

Who can forget the time the then-treasurer, Joe Hockey, said the key to housing affordability was to get a good job. Thanks Joe.

Back to the IMF, the United Nations’ major financial institution. Its report this week said Australia’s housing market could be headed for a major crash because it is so “misaligned” that prices are 50 per cent above what an average household can afford.

The IMF is right about several things: that house prices in Australia are high; that higher interest rates will likely push house prices down further than they have in recent months; and that significant investments in public housing, changes to our tax system, changes to lending rules for housing, and changes to the planning system could all lead to much cheaper houses.

But here’s the reality check: if house prices fell sharply tomorrow, it’s a safe bet our governments would find ways to push them back up. In the 12 months to September 2022, the capital gain on Australia’s housing stock was more than $240 billion, the equivalent of 10 years’ worth of stage three tax cuts.

As an economist, it’s easy for me to agree with the IMF that our houses are overpriced. Likewise, it’s easy to agree the best way to lower house prices is for Australian governments to spend more money building houses and less money on tax breaks for those who own houses, especially those who own more than one. The cost of negative gearing on investment properties is tipped to hit $6 billion next year.

And, according to the Commonwealth budget papers, exempting the family home from capital gains tax – including family homes that sell for more than $10 million – will cost more than $60 billion this financial year. Scrapping those tax breaks and building houses for teachers, nurses and police around the country would do wonders for housing supply and public sector recruitment and retention.

But rather than remove the expensive tax breaks that make housing such a popular form of investment, Australian governments typically prefer to find ways to stuff some more money into the pockets of the first home buyers bidding against the investors for the existing housing stock. As our soaring house prices show, all this largesse does is push house prices up even faster as the first home buyers have a bit more to spend in their bidding war with the investors.

The real winners, as always, are those who already own a house or two, or 10.

So, you see, the key to understanding the politics of house prices in Australia is to realise that the term “housing affordability” is meaningless. While politicians often talk about the price of petrol, electricity and airfares, you’re unlikely to hear a prime minister or opposition leader talk about “petrol affordability” or the “ratio of electricity prices to median income”. They are certain they prefer low petrol prices and airfares to high ones, but they prattle on about “affordability” with housing because they don’t know whether they want home prices to rise or fall, or they don’t want to make their priorities clear.

The IMF report only added to this econo-babble by describing our housing market as “misaligned”. Indeed, it says Australia has one of the most “misaligned” housing markets in the world with prices and rents well above their long-run averages. But no matter how fancy the new terminology, nothing can hide the simple fact that economists don’t know what the price of a house should be and politicians won’t come clean about whether they want house prices to rise or fall.

Complicated terminology aside, I hope the IMF is right. I think house prices in Australia are too high. If they fell it would be good for our society and our economy. And yes, I am paying off a house.

But it’s easy for me to say I want house prices to fall as I don’t need a majority of people to vote for me at the next election. That means I can ignore the facts that a majority of Australians already own at least one house and that those people like the wealth that rising house prices gives them for free (even while they hate the feeling that their children may never be able to afford one).

The brutal truth for those who don’t own a home is that the Australian housing market, and our housing policies, aren’t as “misaligned” as the IMF suggests. Our housing policies just aren’t aligned with what was once called “the great Australian dream” of universal home ownership.

Economists know how to make housing a lot cheaper, but finding a solution for first home buyers that doesn’t reduce the enormous windfall gains flowing to the wealthiest Australians is the kind of “misalignment” not even the IMF would touch.

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