At some point we will have to stop blaming John Winston Howard for every problem we face. For the moment, though, it does seem that whenever we lift the lid on some important issue we find something smelly whose cause was inaction or ineptitude on JHo’s watch.
Yesterday it was how we’re stuck with the Super Hornets thanks to “a lack of sound, long-term… planning decisions by the former Government over the course of the last decade”. Today let’s look at Chairman Rudd’s theme of the week, housing affordability.
[P]roperty prices have jumped 400 per cent since 1986, while income has increased by only 120 per cent.
The mysterious but awesomely-brained Possum Comitatus explains how he ran the numbers, leading to this graph.
It’s worth reading the full analysis, but his conclusion is blunt:
[R]eal house prices remained virtually frozen over the period from 1990 through to 2000. It wasn’t until Howard started stuffing around with halving the capital gains rate and things like the first home buyers grant that real house prices started to accelerate…
It also highlights in real terms just how much the NSW market has dropped over the last couple of years.
Possum’s going to look at our policy options in part 2, coming soon. However The Australian‘s George Megalogenis has already started down that path — from the suitably cynical viewpoint of which options generate the most votes for whom.
In the must-read piece Making housing more affordable, Mr Meganomics agrees with the Possum about one key point — it really isn’t about interest rates.
Rudd has nominated the second half of 2010 — when the next election is due to be held — as the time zone when inflation is meant to come back under 3 per cent. While he can’t make any promises on monetary policy, because that’s really the job of the Reserve Bank, lower inflation should, other things being equal, mean lower interest rates. Yet that won’t fix the problem of housing affordability.
The well-briefed Rudd would appreciate that house prices, not interest rates, are the main driver of housing affordability. So lower interest rates may mean housing becomes even less affordable by the next election.
Possum’s version of that statement is that “the two key metrics that are the foundation of housing affordability are income and house prices, with interest rates floating around as a third lesser order, though still important issue.”.
This demonstrates Howard’s (short-term) propaganda genius. Of the three key numbers only the least important, interest rates, was moving in his favour. By concentrating on that number through two elections, he made himself look good.
Megalogenis runs through the political angles and concludes:
In the short run, that is until the next election, the social goal of making housing more affordable is incompatible with the economic and political goals of staying sweet with the mortgage belt. In the long run, however, Rudd has no choice but to deflate the property price bubble.
He should view this challenge in the same terms as he does climate change: a project necessary to keep Australia viable. Housing should, pardon the pun, become truly freestanding by Rudd’s stated date for paradise: 2020. That is, bricks-and-mortar should lose its taxpayer supports.
Presently, voters expect a handout to enter the housing market and another to buy a second property. These tax breaks make housing less affordable than it would otherwise be.
He then discusses how you might achieve that — and I won’t butcher his arguments but instead encourage you to read the whole thing, including the comments, and think for yourself. Mr Meganomics takes part in the discussion, too. Fun.
I’ll link to Possum’s policy discussion when it appears. However for now he notes:
There is very simple root cause to the lack of housing affordability in Australia, but it is also a cause that has virtually no easy solution — Australia simply has too few large cities for the proportion of our population that chooses to live in an urban environment. As a result, the supply of desirable urban locations to live — be they inner city or hilltop or hinterland or bayside locations relatively near a city centre — is swamped by the enormous demand. Desirable locations lead the charge in house price growth which pulls the price of all suburbs up with it, generally in decreasing amounts the further away one gets from the suburbs with a high desirability premium.
But since we can’t really change this situation over any time frame shorter than the very long term, even if we were to attempt to, the policy options left to address housing affordability issues become more complex as a result of our policy options being forced to try and affect the affordability ends from policy angles that aren’t necessarily the root cause of the affordability means.
John Howard was never good at “the very long term”, of course. Unless it was looking backwards to Gallipoli. Will Kevin Rudd prove any better?