After 5 years of an absurdly overheated residential property market, especially in Sydney and Melbourne, it’s hardly surprising that housing affordability rates are at record lows:
First home buyers in Sydney are being forced to fork out a record 40.6 per cent of average incomes to pay for a typical mortgage, as spiralling home prices make gaining a foothold in the city’s booming property market more difficult than ever.
Home loans ate up more average household income in the three months to June than in late 1989, when interest rates reached 17 per cent, a Commonwealth Bank-Housing Industry Association report shows.
You might expect that a supposedly pro-market forces federal government like that of John Howard would take a leaf out of former Labor Treasurer Paul Keating’s book and explain to Australians that a price correction is simply unavoidable. If more and more people can’t afford to buy a home, the market just isn’t going to keep going up. It isn’t rocket science. The longer it’s postponed the more violent the correction will be. Is Peter Costello dampening unrealistic expectations like Keating did with his “banana republic” remarks all those years ago? Not on your nelly. Instead he’s throwing petrol on the fire, urged on by his Labor counterpart Loopy Latham:
The Federal Government has called on state and territory governments to cut stamp duty to ease the crisis in housing affordability.
A recent report shows housing affordability has slipped to its lowest level in 13 years.
Federal Treasurer Peter Costello argues while interest rates have fallen and prices have soared, state and territory governments have not reduced stamp duty to help first homebuyers.
“I make this point, you buy a house today and you pay what’s called stamp duty. It’s just a stamp that goes on a piece of paper,” he said.
“That’s what it is, except it can cost you I think in Sydney it’ll cost you $16,000 for that stamp.”
Mr Costello has foreshadowed an inquiry into housing affordability.
Shadow Treasurer Mark Latham says it is a national crisis.
He is putting the onus on the Howard Government to do more and introduce tax incentives.
“What we need is some incentives by the Federal Government to help people to save, put aside the money for a home deposit, build up a savings record and literally get their foot in the door,” he said.
Predictably, housing industry spokespeople are also in full-on “rent-seeking” mode, chorusing increasingly insistent demands for governments state and federal to chuck more taxpayers’ money at the housing market to keep the real estate gravy train on the rails. Moreover, we haven’t heard as much as a peep out of the Greens or Democrats on the issue. That’s hardly surprising either: none of them would recognise a sensible policy if they fell over one.
Putting on my political realist hat, I can understand Costello not “doing a Keating” and warning people about the inevitability of a housing price shakeout to restore affordability. It would be tagged as Costello’s “housing crash we had to have” gaffe in about 5 seconds flat. But that doesn’t mean he should be out there urging the States to exacerbate the situation by cutting stamp duty, or contemplating federal assistance schemes that can only make the inevitable crash worse. He should be just keeping his mouth shut while Reserve Bank Governor Ian McFarlane continues trying to dampen housing demand and engineer a “soft landing”.
The infuriating thing about Costello’s cynical fuelling of the housing industry’s “rent-seeking” campaign is that his government’s policies were largely responsible for creating the housing bubble in the first place. CGT changes that strongly encouraged speculative short-term property investment, and an over-generous first homebuyers’ assistance scheme, combined with a prolonged general economic boom over the last 5 years to produce an extraordinary surge in housing prices in south-eastern Australian capital cities (Sydney, Melbourne, Brisbane). Now Costello is urging further government intervention to push housing prices to still more absurdly unsustainable levels
These policies will inevitably lead to an extremely painful property market shake-out in the near to medium term. It’s worth remembering that Japan’s current 10 year recession was caused in part by a property price bubble also engendered by expedient, short-sighted, electorally-driven government policies. However, even before the bubble bursts, Australia’s economy is being damaged. Investment capital is being attracted away from potential productive uses to fuel an orgy of totally unproductive residential property investments. Even more obviously, the Reserve Bank is being prevented from lowering interest rates as a direct result of the overheated housing market. That in turn is a prime factor in the surging Aussie dollar exchange rate, which has made our exports much less competitive and contributed significantly (along with the drought and generally slow world economy) to a worryingly large trade deficit.
Yet no-one, as far as I can see, is protesting against these ridiculous government policies. It’s a classic Emperor’s New Clothes scenario. Are they all insane?