To tackle housing affordability Scott Morrison must get more homes built

Fri, 10 Mar 2017  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/mar/08/to-tackle-housing-affordability-scott-morrison-must-get-more-homes-built 

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To tackle housing affordability Scott Morrison must get more homes built

Scott Morrison is aiming to make housing affordability a key policy aspect of the federal budget in May. If the treasurer can set in place policies that go towards achieving this, it will be good news for the economy and for issues of fairness and equity.

Housing affordability is relatively easy to calculate because it is the interplay of house prices, household income and the level of mortgage interest rates. Nothing else drives affordability, although having a deposit helps too.

There are three factors that can improve affordability: falling house prices, rising wages and lower interest rates.

These factors can combine to make homes easier to buy, such as when a large fall in interest rates compensates for a moderate increase in house prices. But there is also conflict. For example, a solid rise in wages, which would in isolation improve affordability, is almost certainly going to be linked to a tight labour market, rising inflation pressures and rising interest rates. As such, any plan to materially improve affordability through the wages side of the equation would likely run into the problem of higher borrowing costs.

Let’s look at a scenario of a moderate fall in house prices – say 5% a year over a couple of years. At face value, this would appear to be a controlled, soft landing for housing. In Perth, there has been just such a fall over the past two years but affordability has not improved significantly as it has been accompanied by a doubling of unemployment, a surge in part-time employment and record low wages growth. Affordability has been hampered by the weakness in household income growth as the economy has faltered, in part, because of the housing market weakness.

With full employment and moderate wages growth a policy aim, and interest rates often at the whim of global markets and international economic conditions, perhaps the most meaningful way to tackle affordability is through house prices.

Given the bipartisan policy approach to immigration, which contributes the lion’s share of the 350,000 to 400,000 increase in Australia’s population each year, prices are best contained via a sufficient increase in supply.

By 2022 Australia’s population will be about 2 million more than it is today. Whether these new Australians rent or buy a dwelling is secondary to the fact that the number of dwellings in Australia needs to increase by about 800,000 just to meet that demographic demand. The current level of building approvals is just enough to meet that level of growth having been stronger than that during 2016 (noting that there are around 40,000 dwellings demolished and replaced with new ones each year).

Suffice to say that any shortfall in building will skew house prices higher.

Morrison’s upcoming budget cannot have much, if any, influence over wages growth or the level of interest rates in the short or long run. What federal government policies can influence is demand and supply of dwellings. On the supply side, the government can provide financial incentives for state and local governments to release land that is well-serviced by quality infrastructure – such as roads, public transport, schools, hospitals, leisure areas and places to work.

At the margin, negative gearing and capital gains tax changes are important issues to be sure, but they matter little if there is an ongoing supply and demand imbalance in housing. Those tax changes are more about equity, fairness and removing a distortion to the property market, and as a result are worth pursuing. In the short run, they would no doubt take some of the heat out of the housing market. Over the longer run, the impact of changes to negative gearing and capital gains tax would be slight as the focus switched to supply.

As the Treasury will no doubt be briefing Morrison, there are policy changes that can help influence housing affordability. They centre on issues to do with supply, which is where the attention should be in the budget.

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THE LATEST FROM THE KOUK

Why are Bill Shorten and Labor scared to run on the economy?

Tue, 21 Mar 2017

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/mar/16/why-are-bill-shorten-and-labor-scared-to-run-on-the-economy 

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Why are Bill Shorten and Labor scared to run on the economy?

The dust is settling from the Western Australian election and there are some implications for the way the federal Labor party should conduct itself from now until the next election if it is to enhance its chances of winning.

For the Liberal party, the lessons are clear. It might sound trite to mention it but its electoral success will depend almost exclusively on its ability to deliver materially better economic conditions between now and election day.

For Labor, the task is easier. It needs to take the initiative on the economy, economic policy, the budget deficit and government debt and highlight how poor the Coalition has been in most aspects of economic managements since the 2013 election.

In those three-and-a-half years of the Coalition being in charge of the economy and budget, growth has been sluggish despite favourable conditions in Australia’s major trading partners. The Australian economy should be stronger because of the welcome news of the Australian dollar falling sharply in recent years, which has provided a boost to domestic economic conditions. What’s more, interest rates have been cut to record lows, yet the economy has been struggling to register annual GDP growth near 2.5%, the unemployment rate is the same as when the Coalition won the 2013 election, wages growth has plummeted to a record low, and the government debt has grown significantly faster than during the previous Labor government, which of course included the fiscal stimulus measures that kept Australia out of recession.

Ever since the mid-1990s, the Labor party has been reluctant to run hard on issues to do with the economy. For some reason, it is riddled with self-doubt that stems, it appears, from the high interest rates of the late 1980s and early 1990s, and its proactive use of budget debts and moderate debt accumulation during the global crisis to ensure Australia kept growing and to protect an estimated 200,000 jobs.

A $2 billion national building snow job

Sat, 18 Mar 2017

Prime Minister Malcolm Turnbull reckons his Snowy Hydro $2 billion investment is a “nation building project”.

Yes, that is what he said. Really. Turnbull think a one-off $2 billion government infrastructure project is “nation building”.

Let’s look at $2 billion in the context of the Australian economy.

In the December quarter 2016, Australia’s GDP was $435,445 billion dollars (seasonally adjusted). This works out at $4,769 billion a day which makes the $2 billion snow job about 10 hours GDP.

Useful? Sure!

Nation building? Ha!

By 2020, Australia’s GDP will be around $510,000 billion a quarter and $2 billion will be akin to about 8 hours GDP.

Here’s what elese $2 billion is now days.