Housing crisis or just bad policy?

Most of us breathed a collective sigh of relief when the Reserve Bank of Australia announced earlier this month that interest rates would remain on hold: most of us that is, with the exception of Tony Abbott and Joe Hockey.

It is little wonder that there is so much focus on interest rates, with the RBA telling us that the size of household debt owed to banks in this country is $1.2 trillion.

This issue of interest rates is a political double-edged sword: when they are low, the government talks of the fiscal responsibility that brought them down, while when they rise, the opposition sings the “mismanagement” tune. Both the electorate and media now seem to use interest rates as a kind of proxy to judge the economic management of the government of the day.

In a globalised economy, the direction that interest rates take has as much to do with international factors as domestic management - and as a result, this proxy can be misdirected.

A better way to judge economic credentials and leadership is by looking at the issue of housing: who can afford what; what are the inflationary implications; where is it located; and is it both economically and environmentally sustainable? These questions should not be limited to home ownership, but also need to be applied to the rental market.

If we use these more complex measures, then it is hard to find a government in the last two decades whose management is satisfactory.

Housing is a multifaceted issue and seems to highlight the worse aspects of federal government policy, private sector self-interest and demarcation lines of decision-making that paralyses the ability to act. Yes, all three tiers of government should play a role, but we need a sense of direction rather than accusations of blame.

So how do we understand the current housing crisis in Australia: both in terms of ownership and rentals? The most straightforward way is to look at supply and demand.

On the demand side, we see high levels of immigration that undoubtedly play a role. The real problem, however, is government policy that encourages market exuberance. Among industrialised nations, Australia’s property taxation regime is skewed towards rewarding both investors and owner-occupiers at the expense of renters and potential buyers. If we look at the figures, they are astonishing, with the Senate Committee on Housing Affordability reporting that:

… the combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements is estimated to be in the order of $50 billion per year.

This is hardly surprising if we take a closer look at negative gearing. An analysis of figures by Tim Colebatch shows that between 1993 and 2007, the number of landlords reporting profits grew by 36,000 while, in contrast, those reporting losses was 594,000 at a total of $6.4 billion. We cannot estimate how many of these are real, but we can speculate that many are paper losses to minimise tax.

Despite these figures, the housing industry’s contribution to the debate is often limited to complaining about fees and taxes such as land tax and stamp duty: a simple answer to a complex problem that is unlikely to wield any benefits to the broader community.