Secretly, many politicians are quite happy about unaffordable housing
What’s not so harmless are the endless lies politicians, of all persuasions, tell about their aspirations for the housing market. Practically all of them, including Minister O’Neil, profess to want “more affordable” houses and apartments, but in reality most back policies they must know will have the opposite effect.
The government’s latest plan to subsidise lenders’ mortgage insurance for first-home buyers, allowing them to buy a home with as little as a 5 per cent deposit, is a classic example. Combined with official cuts in interest rates in recent months, cheered on by the political class, Labor’s policy is bound to make homes more expensive and less affordable.
It’s a sad indictment of the level of economic understanding of many voters that it’s not obvious to them that subsidising demand by permitting bigger loans, even for a portion of buyers, will push up prices overall.
Reputable modelling by Lateral Economics for the Insurance Council this week estimated prices would rise between 4 and 7 per cent in the first year of the election pledge alone.
Martin Eftimoski, a former Reserve Bank economist who has joined the nation’s army of real estate advisers, also warned the policy would “set the market for properties between $800,000 and $1.5m on fire in Sydney”.
Independent economist Chris Richardson this week estimated the benefit of saving on LMI would be wiped out if dwelling prices increased only 0.5 per cent in aggregate, let alone the larger, more likely increase in the pipeline.
“We’re actively making housing less affordable at the same time as the ‘help for younger Australians’ translates in practice to ‘more money for older Australians’,” he said.
To be sure, the Coalition’s election pledge to make home loan interest tax-deductible would arguably have pushed up prices even more, for similar reasons.
Government policies have made construction of dwellings more expensive too, by adding a thicket of feel-good planning and environmental regulations that politicians know can only add to the ultimate cost of housing. The time it takes to build a new home has jumped from a little more than eight months to almost 13 months in the past three years, according to Institute of Public Affairs analysis of ABS data. No wonder the government’s vaunted target to build 1.2 million homes by 2029 is projected to fall almost 300,000 short.
And when they do manage to build, governments then inflate costs further with stamp duty, infrastructure levies, and charges that have nothing to do with bricks and mortar but everything to do with state treasuries addicted to property revenue. Every added dollar of these costs is passed on directly to the buyer and, in aggregate, pushes prices further from reach.
The political economy is easy to understand: roughly two-thirds of the voting public, either outright owners or those with a loan, perceive they benefit from rising dwelling prices. Indeed, 68 per cent of Labor and 57 per cent of Coalition politicians own at least two properties, according to analysis this year by the Nine Entertainment papers.
The people making housing policy are disproportionately those who gain from housing inflation. So don’t expect to hear much advocacy for “cheaper housing” because that implies falling house prices – something they know most voters, banks and their own treasuries don’t want. “Affordable housing” is a politically safe euphemism: it signals concern without ever promising to bring prices down.
I write “perceive they benefit” above because it’s unclear this national desire for ever higher dwelling prices ultimately makes us more prosperous. Quite aside from the obvious fact that aggregate increases don’t alter the property pecking order, the diversion of ever greater shares of income into repaying home loans enriches only the financial and real estate sectors.
Perhaps it’s no coincidence Australia’s embarrassing recent record on productivity and innovation coincides with the era in which speculation on housing became the country’s main economic activity. Capital funnelled into property – often speculative investments such as second homes or rental apartments – yields lower productivity gains than investments in technology, manufacturing, or education. A country where talented young people, such as Eftimoski, become real estate advisers instead of innovators or scientists shouldn’t be surprised when its economic dynamism withers.
Australians should be told that the only durable way to make housing affordable is for housing to become cheaper relative to income. If that means some recent buyers, including myself, don’t get to enjoy the misguided thrill of paper capital gains for a few years, then so be it.
Pruning regulations is laudable but isn’t a silver bullet. Lots of homes, high- and low-density, can already be built but for whatever reason they aren’t. In other words, the actual density of housing observed in any given area is often less than maximum permitted under existing zoning regulations.
Significantly reducing immigration for a time to see the impact on rents and prices would be a valuable experiment.
My fear is a refusal by both sides of politics to countenance anything that might lead to a decline in the value of housing in absolute terms, or relative to other assets, will ultimately lead to extreme, high-tax policies. Calls for the reintroduction of inheritance tax are beginning to be heard. It would be far preferable to let the air slowly come out of dwellings than go down destructive, higher-taxation pathways.
Some greater honesty with voters would be appreciated. Politicians will keep uttering the safe phrase, “more affordable housing”, while quietly celebrating higher prices. It’s a perfect love story of its own: between political cowardice and economic folly.
Adam Creighton is senior fellow and chief economist at the Institute of Public Affairs.
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Housing Minister Clare O’Neil on social media this week lauded the impending marriage of American multi-millionaire celebrities Taylor Swift and Travis Kelce as “the perfect love story”. I’m not sure which is worse: the minister actually believes it, or her staff thought the message would resonate with voters. Either way, it’s not an especially edifying manifestation of our political culture, albeit being harmless enough.