The political narrative on housing – Woe unto the one who suggests prices may fall..

A political paradox – Woe unto the one who suggests prices may fall..

Housing affordability has been the name of the game this week.  We’re coming up to a general election and ‘lo and behold,’ much to the distaste of those who deny Australia has a housing affordability crisis – and first home buyers are just being spoilt and picky – research by ‘Auspoll’ has revealed that 84 per cent of Australian’s put housing affordability top of the charts when rating election issues by areas of importance.

The article which appeared last week across various ‘News Corp’ publications, focused on key electorates in which ‘housing affordability’ came streets ahead of other hot topics such as ‘education’ or ‘border control’ – accompanied with case studies where 50 per cent or more of family income is going towards mortgage or rental payments alone.

Cited within the report was a 2007 comment by the then Opposition leader Kevin Rudd, who in an attempt to boost his popular vote, told former Prime Minister John Howard that;

“housing affordability is the barbecue stopper right across Australia.”  

It’s interesting to chart the political narrative regarding housing matters – because after years of lousy half hearted initiatives, which have done nothing to markedly advantage the two most venerable demographics of our market – principally first home buyers and renters – we have no sustainable interventions in place to affordably accommodate a rapidly expanding population, all of whom will need some form of shelter.

And whilst Australia has sailed the ship of good fortune, sheltered within a resource rich environment, and most families have adjusted their lifestyles to suit their income and as such, never feel particularly ‘well off’ even when earning substantially more than the median income – for those working at, or falling below the median, the cost of accommodation is an increasing drain on the economy and well being of our society, resulting in areas of socio-economic advantage and disadvantage in an English-style cultural or class divide.

Since 1974 during which Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out: “The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it” political advocates from both sides of the playing field have weighed into the debate.

Policies such as the NRAS, the first home buyer’s savers account, and spruiked initiatives to increase infrastructure have all failed to make significant or sustainable inroads to either supply based concerns, vacancy rates, or first home buyer percentages.

A few decades on, and it seems whilst everyone wants to be popular and ensure housing is ‘affordable,’ – years of easy capital gains and tapping into the housing equity ATM machine, have made any contemplation that prices should drop – or even stabilise for a lengthy period of time – downright out of the question.

Or as John Howard worded it during prime minister’s question time approaching the end of our 2007 housing boom;

“A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices”

And perhaps it’s worth mentioning that Howard’s response was in reply to a question challenging the plight of first home buyers from soon to be elected Kevin Rudd – who upon taking office – less than 12 months later – promptly inflated the market three fold with his first home buyers ‘boost,’ which bore the consequence of leaving our most inexperienced buying demographic in subsequent negative equity once it was stripped away.

Earlier this year, the question of housing affordability once again raised its political head, however this time it was in the form of ‘point-scoring.’

In a television program back in May, Joe Hockey made the call that house prices in Canberra would lose capital value under a Coalition Government.

“There is a golden rule for real estate in Canberra – you buy Liberal and you sell Labor,” Said Hockey.

The response from Kevin Rudd – the ‘then’ former PM – who ‘championed’ the cause of first home buyers with his ‘vendor boost’ as Professor Keen aptly named it, was;

“Can I just say, Joe, I’m not sure that will go down well with all the voters in Canberra,”

Labor politician Andrew Leigh who represents the Canberra seat of Fraser was not slow to weigh in on the debate;

”When the Liberals came to office in 1996, they wiped $25,000 off the price of a Canberra home….Today, Joe Hockey proudly jokes about how he’ll do it the same again”

A comment that was promptly disputed by ACT Liberal Senate candidate Zed Seselja, who – whilst paddling frantically against any suggestion that prices might drop under a Liberal Government, cited the ‘moving annual median house price’ from the Real Estate Institute of Australia with the comment

‘‘Prices dropped more in last two years of the Keating Government than they did under Howard’s first 1.5 years, and to its lowest point,’’

As I said, – woe unto any politician who suggests market prices may actually fall.  Far better it seems to burden buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask rising costs under the false premise that residential real estate is getting ever more affordable – particularly in light of a construction industry that’s struggling to make any headway.

In 2007 in a report Entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary (hat tip @bullionbarron) which contains quite a broad analysis on various actions that can be employed to ease the strain on first home buyers and renters – once again the paradox of protecting the capital value of property whilst still aiding affordability is underlined;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

As for the policy of Negative Gearing, which was introduced and subsequently advocated to assist the lowly renter and reputedly ease the burden on social housing, (waiting lists of which are increasing) – the very same policy which property commentator Margaret Lomas suggested to ‘Property Observer’ would make “600,000 individuals homeless” if scrapped – coupled with the CGT discount of 50 per cent introduced by John Howard in 1999, which resulted in a 30 per cent increase in investment activity alone. It’s been by far and away the best incentive for the individual investor, fuelling speculation into the real estate sector and consequently creating a massive bubble of undiversified private debt.

And whilst I am not against investment into the residential real estate market, it makes little sense extensively encouraging it from a policy perspective if it doesn’t achieve;

1)      An improvement in housing affordability and supply;

2)      An increase in vacancy rates;

3)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and

4)      Lower rents for the most venerable in our society

All of which negative gearing has failed to do.

As I pointed out in my column last week – whist it would be unfair to condemn individual investors for taking advantage of various tax incentives in an effort to secure their financial future, any Government that puts in place policies to fuel speculation and subsequently inflate prices in a vehicle that suffers from inelastic demand side levers, yet is essential to the development of both individual and community culture –  is a Government creating a difficult paradox as to how to advantage those who entered at the beginning of the lending boom – (during which capital price to income was lower) – compared to those who find themselves at the sticky end of housing’s historical journey in which mortgage debt has inflated fourfold.

Now we have a situation where household debt to income sits close to 150 per cent with ‘Moody’s Analytics’ in a paper entitled “Trends in Australian consumer lending demonstrating how Australian banks have the highest exposure to residential mortgages in the world.

It was years of dizzy speculation into the established real estate market which resulted in prices escalating to their current heights, with banks only too eager to create credit through the extension of mortgage lending which in the ten years to the GFC, increased in-excess of 450 per cent.

And despite the innocent impression some try to imprint suggesting we have a stable and responsible banking sector.  Global measures to date, which aim to ensure a similar GFC crisis does not occur again, do not go far enough in ensuring financial institutions fund their investments with substantially more equity than current regulations dictate.

As Moody’s Analytics managing director Tony Hughes and senior economist Daniel Melser suggest;

“Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure (to home loans) represents a major concentration risk for banks and the Aussie economy,” comments not to be taken lightly.

The influence of investment into the property sector was noted as far back as 2003 in a Productivity Commission Inquiry on First Home Ownership submitted by the RBA.

The study concerned itself with the effect of “strong and rising house prices which were burdening new home owners.” And noted

“The most sensible area to look for moderation of demand is among investors.”.. “In particular, the following areas appear worthy of further study by the Productivity Commission”

The report noted some key investor incentives which in light of the comments above, could be moderated

1.)            “The ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;”

2.)            “The benefit that investors receive by virtue of the fact that when property depreciation allowances are ‘clawed back’ through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.”

3.)            “The general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.”

This was 10 years ago – and without putting too blunter note on it – we’re no further forward.

In addition – for those who continually suggest house prices are as high as they are simply because we have a ’shortage’ of accommodation, the same report highlights;

“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing”

There are plenty of initiatives which can be employed to ease affordability – albeit an active attempt to gradually ease investor demand in our established housing sector, whilst facilitating the construction sector, should be one of priority.

A few days ago I read an interesting blog by R P Data investigating why the current upward cycle may be different and more tapered to the last.

The comment was made that first home buyers ‘tend to push prices higher…. because their behavior can be more emotional than other segments of the market’ whilst investors are ‘more clinical’ when acquiring real estate.

It may seem a sensible assumption to conclude, however as is often the case when assessing behavioral economics, the reality can sit some distance away from the broadly held perception.

There has without doubt been a push in home prices from first time buyers in periods during which easy credit has been offered on a plate by way of incentives and grants to the inexperienced proportion of our buying market.

However, without these dynamics, investors play (and have played) a far bigger contribution to price rises in Australia’s real estate market – and from my own anecdotal experience, seeing an investor pay over and above what a property is worth, (based on an educated assessment of recent comparable data,) is a work related Saturday pastime.

As it stands, compared to last year, all states are experiencing an investor lead boom. Victoria’s numbers are up 11.3 per cent, Queensland 4.3 per cent, South Australia 8.3 per cent, Tasmania a more modest 1.5 per cent, ACT is up 11.1 per cent, the Northern Territory up 28.5 per cent with the outright winner, Sydney up 35 per cent.

You don’t have to be Einstein to work out where all this is heading.

Catherine Cashmore


6 thoughts on “The political narrative on housing – Woe unto the one who suggests prices may fall..

  1. Remmelt Ellen says:

    Dear Catharine, I left the comment below at Property Observer, but seeing this article was originally posted on this blog, I’ll post my comment here:

    Great, professionally-written article. Thank you.
    I very much appreciate the emphasis on the role of speculators pushing up prices, which articles nowadays often wholly attribute to a lack of housing. As Professor Steve Keen noted, the rise in prices in the US was also explained / rationalised with the need for more housing construction, which seemingly turned in a great housing excess when prices fell back from their overvalued levels. Having said that I have seen several statistics that indicate that construction in Australia has been below historical norms, so I could be wrong.

    Also the critical look at the how the government played a role by taking ineffective action (by not stemming the flow of mortgage debt and property price growth) is appreciated. The FBHG and negative gearing measures have also aided the price growth. As you noted, mortgage debt in Australia is currently high and is concentrated in the books of a handful of Aussie banks which have not been able to diversify away (well at least not at their expense) as well the risk as the US did through CDOs (though they also ended up buying CDOs from each other). The recent report by Tony Hughes which put Australian mortgage debt at ~63% (unfortunately, I haven’t been able to find the full report) of total loans with the average debt to equity of around 7 for banks, it could spell trouble in the future for banks and bailouts down-under.

    I think it’s fair to look at precedents in the US, Ireland and other bubbles to get a rough sense of what could happen. Looking at the bigger picture, I think Australia has been lucky to have been 22 years without a recession, being supported by debt and property price growth and sheltered from the Great Financial Crisis by the infrastructure spending in China. This can be likened to a rubber band being stretched far back and then let go – eventually mean reversion comes into play. Have you perhaps considered how the decline in mining resource exports (and corresponding decline in mining investment) starting now could pop the property price and debt bubble and then thus act as a painful catalyst to make housing more affordable again?

    While admitting the great difficulty in making accurate predictions, I think the interplay of a multitude of factors will quite likely cause a slowdown this year, possibly cummulating in the beginning of a negative GDP recession by the end of 2013, and likely a worse-than-average recession in 2014.:

    – the poor economic prospects of Australia’s two biggest export markets, China (property overvaluations, infrastructure bloat due to years of investing making up bigger share than consumption, an unprecedented half of GDP growth) and Japan (government insolvency weren’t it for low interest rates asked by Japanese bondholders and the “virtues” of monetary stimulus, for now) in the years ahead

    – the prices of iron ore and other commodities at historical inflation-adjusted highs with many facing individual headwinds (coal and LNG exports damaged by shale-gas “revolution” in the US and elsewhere, gold price currently down, uranium exports stymied by Japanese nuclear reactor incident, Chinese slowdown in debt growth and corresponding infrastructure weighing down on iron ore and cement, etc.

    – a still weak manufacturing sector due to the “Dutch-disease” phenomenon over the previous decade, and the great rebalance that must occur for economic stability

    – household debt at 150% of income being around a level that has historically seen mean reversion in other countries (i.e. debt deflation)

    – economic background of a world mostly recuperating very slowly from a big debt-deflation after the debt growth and asset price build-ups in the late 80s, the 90s and early 2000s

    – long-term population greying

    – the negative indicators starting to pop up everywhere: housing prices having declined since 2010 with occasional spurts (admittedly with prices currently holding up and some increase in house applications / mortgage growth since interest rate cuts beginning this year), clawback of mining investment, starting of recessions in several mining states, slowdown in GDP growth in China (admittedly with the precise magnitude being unknown because of the unreliability of the numbers) and the party’s efforts to curb debt growth (increasing the risk of a debt-deflation spiral in the short-term)

    – what goes up (significantly) must go down (significantly)

    Of course there are a couple of positives that slightly offset the negatives.
    Things that come to mind are the following:
    – the low government debt allowing us to catch the blow of a recession with bailouts, monetary stimulus, etc., (like Ireland did). This would effectively mean a transfer of debt from the private to the public realm.

    – some leverage yet to stimulate economy by pulling down interest rates (though this will become decreasingly effective with each step)

    – having our own currency (as opposed to European periphery, for example)

    – the Australian dollar finally having dropped, providing some support to the manufacturing sector and helping the resource sector to ease out

    – the realisation of the Rudd government (if voted in again) of the difficulties lying ahead for the resource sector rebalancing

    There are some other important ones. But not, in my opinion, any that hold significant sway in the bigger picture. There is also a distinct possibility that the worse-than-average recession I think will occur in 2014 will evolve into something as bad as the GFC was for the US.

  2. Remmelt Ellen says:

    Hi Catherine. Thank you too for your reply.

    Having just discovered your articles, I’m enjoying the realism and pragmatism with which you describe the Australian situation (I could be biased though, as I share many of your views). Surprisingly, this is a rare trait across commentators on real estate and economy and a lot of confirmation bias, incentive bias, overoptimism and denial seems to slip through unknowingly.

    I was struck by the article “The true purpose behind housing policy.”, never having considered myself that the government would actually very much know the inflationary effects its housing policies have but that they would fool the Australian public to boost the construction sector (I’ve been cynical about government intervention in construction, as in other areas – shouldn’t this be about long-term utility to citizens, instead of a one-off mid-term artificial boost to the economy?

    If you have the time, could you mention / provide reasoning for which of my conclusions you disagree with? I have a lot to learn and would love to hear any different opinions.

  3. Hi Remmelt – I’ll address some of your concerns as soon as I get a moment, however needless to say I broadly agree with your comments. Housing has long moved out of the realm of being for ‘public good’ and providing an essential service to society, into one that is full of vested interests behind which sits a monetary framework which is inherently flawed and dictates – at all costs – that the market must not be allowed to fall. I appreciate your comments and interest, and hopefully I’ll have time to go into more detail in the days ahead.

  4. Remmelt Ellen says:

    Dear Catherine,

    I came upon an interesting 40 minute interview with Michael Pettis about China’s future from a macroeconomic viewpoint. In my opinion, he gave rational, unemotional arguments while not pretending to know how everything will turn out. I thought he distilled a very complex system down so well that I’d share the link below:

    If you have the time available to watch it, I’d definitely recommend it.

    Kind regards,


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