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.

Then there was the so-called “first home buyers schemes” which helped create a false sense of affordability with an all too predictable outcome: house price inflation. The scheme simply means everyone ups their willingness to pay by the equivalent of the handout and does nothing to make housing more affordable.

The increase in housing prices that follows these policies creates a false sense of satisfaction and the net result is neutral because most of us buy and sell in the same market. Despite this, at most dinner parties you find someone talking up how much their house is worth often forgetting that rising house prices can not make us all wealthy.

The other side of the equation is supply. Despite the massive asset price increases in housing, Australians have not actually built many houses in the last 10 years. Again the property lobby offers a simplified answer to housing shortages: release more land on the urban fringe.

This is a ludicrous solution because most people do not want to live in areas that are under serviced and require very long commuting times. Further, with cheap fuel becoming a thing of the past, most who can barely afford a house will find the commute financially crippling.

Despite the obvious problems with extending cities, this has been the solution for far too long. Both the shape and structure of Australian cities bear witness to the fact that urban planning in this country is basically non-existent: our cities are among the least dense in the world, are under-serviced and have huge environmental impacts.

So what is the solution to an over-valued market in terms of both average wages and the yields on rental properties?

The first thing to state is that we do not need more houses. Despite what developers tell us, property analyst Hometrack believes that housing may even be in excess in Australia. Their argument is that ABS data significantly under-estimates the housing supply by only counting "occupied dwellings". On the 2006 census night, for example, the ABS reported 8.3 million dwellings while Hometrack believes that there are at least 10 million dwellings in Australia. This difference, according to Hometrack, is made up “of a mixture of housing awaiting sale or development, vacant dwellings, second homes, and abandoned homes".

The second is to revisit the issue of density and planning. We need to get better at planning liveable cities that do not simply expand out. Medium density housing needs to be encouraged through better amenities and taxation.

Third, we must revisit the recommendations in the Henry Review associated with negative gearing and capital gains taxes. These were sensible recommendations that had the support of many economists as they remove distortions to different types of savings.

Finally, we need to look at long-term leases that allow renters to live with a sense of security: particularly for families looking for stability. Five to seven-year leases would encourage long-term investors and discourage speculators - and have a significant impact on housing prices.

For too long housing policy has been limited to quick fix solutions that continually benefit developers and those already comfortably set in the market. The next federal government needs to show leadership and not shy away from confronting established interests - or we will simply get more of the same. It does not take a genius to tell us that more of the same is likely to lead to … more of the same.