All political campaigns generate their own examples of economic idiocy and this one in Australia has been no exception. Listening to the radio this morning, though, reminded me of this. I thought I was listening to some hick economic populist - then I realised it was a serious policy announcement from the Opposition.
For the last few years there has been an enormous growth in the capital value of housing, resulting in (measured from average wages) a large difference in affordability.
The announcement was of a tax break for people who have not yet owned a home to create what amounts to a special savings account for the deposit required to buy a home "so that they can get out of the rent trap".
Looks attractive - sensible policy right? Wrong - and this is wrong on so many levels it is not funny.
- Renting is not a "trap" it is a valid financing decision for a home. If you believe that housing prices are going to drop renting is a good idea. Renters in Japan over the last decade, for example, would be laughing at those who borrowed heavily to get into the "joy" of home ownership. The same could happen in Australia particularly given the high current prices.
- Renting is also very useful if you are only going to be in an area for a few years - if you have the sort of job that moves you around a fair bit then it may be completely inappropriate to buy.
- Giving tax incentives to buy your first home reduces your mobility - your tendency to move to get that next job. The government will help you get that first home, but not the second. In fact the Australian State governments will tax you for doing so - probably taking all the money the Feds dropped in to help you buy it and more. If you are not prepared to move for a job then you are either going to stay where you are or, worse, become involuntarily unemployed.
- Most crucially - the housing affordability "crisis" is not going to be solved by throwing money at it. It is not. The problem out there is not that there is not enough money chasing homes, the problem is that there is not enough housing being built. With prices above record levels in most of Australia there is little or no evidence that more money will solve the problem - in fact the reverse is true. All that more money thrown at the housing market will do is to increase prices further, further reducing affordability.
- Glib, shonky promises like this one give the impression of helping without actually doing so and end up convincing more people that there is something seriously wrong.
There are many more problems, but that is enough to go on with.
If the opposition (or the government) were serious about tackling housing affordability there are a few steps they could take:
- Release more land for building - either green or (better) brownfield land for multi-unit development. This is the one step that will truly tackle land prices.
- Reduce or eliminate taxation on land and building construction and transfers to reduce the costs of moving.
- Do the same for the firms seeking to supply building materials to reduce the costs of those materials.
- Recognise overseas qualifications to improve the labour supply.
- After the others - remove the impediments on lending to people seeking to build or buy a house, such as the 80% LVR restriction.
I would also like to see the development of alternatives to the current means of financing house purchase - such as encouraging the development of Musharakah financing, but this is not an immediate way to reduce prices.
Personally, as a home owner, I am very happy with the situation. I am just glad I got in a few years ago. For the Australians that do not currently own a house, and want to do so either now or in the future, the best you may be able to hope for is that Peter Garrett (ex-lead singer of Midnight Oil) was right.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...