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: 


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.

comments powered by Disqus


As house prices fall across Australia, should we be worried for our economy?

Tue, 13 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

Trump could cause the next global recession: here's how

Wed, 07 Mar 2018

This article first appeared on the Yahoo7 Finance website at this link: 


Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.