The PM seems to understand the challenges, but housing is a tough policy area

HOUSING must be one of the most politically sensitive areas to set laws for state and federal governments -- and one of the most difficult.

HOUSING must be one of the most politically sensitive areas to set laws for state and federal governments -- and one of the most difficult.

 Consider the many issues in the melting pot for our politicians to take note of. Home ownership is an Australian tradition, even if the actual rate is only about 30 per cent. So too is the ability to make a capital gain from your family home (we will see how long that lasts). Developers are major donors to political parties, and an increasing number of people are gearing themselves up with investment properties.

And perceived pressures on population lead some people to even question urban density.

Also in this mix is the need for state governments to tap into revenue streams from stamp duty taxes. Such regressive taxation isn't ideal, but with the taxation compact between the state and the federal governments as messed up as it is, and has been ever since World War II when the states lost the power to tax income, stamp duty is a crutch for the states to fund hospitals, schools and police.

The role of the banks in setting interest rates means housing policies are wrapped up with monetary policy settings, which isn't even supposed to be the preserve of governments.

Most analysts will tell you Australia's property prices are inflated when compared with prices from most parts of the world. The Economist regularly features this phenomenon. Sydney has long been a pricey international city, but recent newspaper reports suggest Melbourne prices have caught up (a cost of living issue, which hurt Labor at the recent Victorian election). The Perth market has been slow lately, but its house prices near doubled a few years ago courtesy of mining boom Mark I, and may do so in the not too distant future with mining boom Mark II now upon us.

Reasons for Australia's higher than usual prices for property include that the family home is exempt from capital gains tax, we provide generous tax incentives to invest in property, such as negative gearing, and we have long provided generous government subsidies for new home buyers.

And because immigration in Australia has been higher than on average for some time now (courtesy of the Howard government winning mainstream confidence for higher immigration because of its tough border protection policies), demand is outstripping supply, in no small part because the release of land in outer suburban areas has also been slow.

Housing policy is therefore a complicated policy area for politicians to make major adjustments to, which is why best practice when doing so is usually trumped by political calculations. Interest rates, immigration, urban density and profitability of home ownership and investment in property are powerful factors affected by the tiniest change of policy setting.

Can you imagine the fallout a federal government would face if it announced it planned to start taxing the family home, an adjustment many housing experts believe could be good policy? The public reaction would be worse than the response to the first incarnation of the mining tax, even if offsets such as tax deductibility on income were included in the adjustments, as happens in the US.

Or what if the government moved to restrict the number of investment properties people could negative gear their incomes against? That might be a way to take some of the upward pressure on prices out of the equation, but it would leave existing investors upset, and there is an argument that it could constrict what is already a tight rental market.

Fewer people investing in property means fewer rental properties available. When supply is already a problem, people in lower socio-economic circumstances don't need that. State governments love to campaign on the promise of doing something about stamp duty costs, which stifle mobility as people try to avoid the tax hit by simply not moving. But little is ever done by way of major changes to stamp duty costs. At the recent Victorian election, Ted Baillieu promised an inquiry into stamp duty, but when you look at the policy it resembles the sort of commitments Kevin Rudd made from opposition ahead of the 2007 federal election: high on talk, low on tangible delivery commitments.

Now might not be the right time to start a debate on changes to property rules, given that the markets appear to be cooling as international uncertainty abounds in the wake of Ireland's debt problems. But there is never a right time, let's face it.

The only federal politician to seriously try to start debate on housing policies and whether major (not minor) adjustments were needed was Mark Latham.

That probably means no politician for a generation will go there again. But even Latham only had the courage to discuss it well before he became opposition leader, and once he rose to the leadership he was quick to hose down any prospect of taxing the family home or limiting negative gearing on investment properties, twin ideas he had considered from the backbench.

The long-term challenges as to how Australia shapes itself for the future are anything but small. From an ageing population to trying to gain the best benefits from a once-in-a-generation mining boom to what to do about affordability issues in an era of rising cost of living pressures, our politicians must be planners not presiders.

Rhetorically, Julia Gillard seems to get the challenges ahead, but then so did Rudd. The challenge is moving to action instead of just words. But with the government putting so much effort into winning the debate over its NBN policy, it just doesn't have the political capital in reserve to start other battles. Especially in a policy area as complicated as "what to do about 'ousing", as a constituent described it when heckling Robert Menzies on the campaign trail in the 1950s.

With complicated government policy setting now affecting housing affordability, the answer has to be more than "put an 'h' in front of it", as Menzies suggested at the time.