Before I get on to the question of how effective the Reserve Bank’s actions are, it’s worthwhile to pause and consider the deeply compassionate thinking of the priests of the temple of economic orthodoxy. Here’s Alan Wood:
A complaint from ordinary Australians is that they are not the ones causing inflation, but with domestic demand running at more than 5 per cent, and a lot of it consumption spending, it doesn’t wash.
That’s after he’s explained that interest rates will not trouble those with high incomes as much as those who are “struggling”, although there’s a fair bit of obfuscation along the way. That also raises the question of the genuineness of this sort of claim:
The obvious but important point is that inflation is a national problem, and unless the pain of bringing it back under control is widespread, monetary policy won’t work.
As I argued in New Matilda the other day, singling out wages inflation as a primary cause doesn’t appear to have led to shared pain. And there’s at least an implication that “those who have taken on the highest risk” are somehow morally at fault - a spectre that often lies behind the apparently impersonal language of market choices. But, of course, all this pain will be in vain if the assumptions that underlie monetary policy are wrong. Peter Martin in his column in the Canberra Times interviews a couple of economists who think they may be.
Martin is discussing the question of the NAIRU - the “non-accelerating inflation rate of unemployment”, which Malcolm Turnbull made famous when he tried to play cute in Question Time with Wayne Swan. The idea is that if unemployment falls below a certain level, inflation rises. So, if you accept this argument, according to Martin, you try to slow the economy and induce more unemployment to restrain inflation. Here’s what his interviewees had to say:
By the way, a senior Treasury economist confirmed in a speech last
year that he thought the answer was “currently around 4.7 per cent,
although there is a considerable band of uncertainty.”If the NAIRU is 4.7 per cent then around 66,500 jobs will need to be
sacrificed to achieve it. 4.1 per cent will have been as good as our
rate of unemployment got.Swan dodged the question in parliament, but two days ago on the Sunday
program confirmed that the fight against inflation would cost jobs,
saying that “the economy may slow a lot but I have no advice from the
Treasury that suggests that unemployment will increase substantially”.
Note the use of the word “substantially”. Swan accepted the premise
that unemployment was about to stop falling and begin to climb.If Turnbull, Swan and the harbour full of economists are right, our
dole queues are about to grow again after shrinking more or less
continuously for 15 years.But not everyone agrees.
Dr Barry Hughes is the doyen of Australian labour market
specialists. A former professor of economics and an advisor to Paul
Keating and several state premiers he knows his way around the
employment stats better than anyone else.In a study released this week by the Australian Industry Group he
has dared to challenge the conventional wisdom by asking “how natural
is the Australian natural rate?He has a number of problems with the idea. One is that Australia
appears to have two rates of unemployment at the moment – a low one in
the mining-rich states “where wage and price inflation has been
increasing and is almost completely outside the control of the
authorities” and a higher one in the rest of the country where “the
natural rate of unemployment seems to have gone missing in action”.NAIRU turns out to be elusive. Like the Loch Ness Monster, whenever it
is sited, it moves.Back at the start of the decade NAIRU was believed to be 6 per cent.
If unemployment fell lower than that, it was thought that inflation
would rise. Unemployment did fall lower, inflation didn’t rise and so
the estimate of NAIRU was cut. It’s a continually moving constant.Dr Hughes has dared to suggest that the conventional view about NAIRU
“might be incomplete, if not wrong”.Professor Ian McDonald of the University of Melbourne has calculated
an alternative lower-bound to sustainable unemployment using a
different method popular in Europe.It abandons the traditional assumption that a low rate of unemployment
will automatically spark inflation by pointing out that that depends
on a number of things including trade union power. Australia’s trade
unions are weaker than they used to be, partly as a result of
WorkChoices. As a result it might now be possible for unemployment to
fall very low without sparking wage-price inflation.His estimate of the lowest sustainable rate of unemployment in
Australia right now is 2.5 per cent - a rate that seems low only to
Australians with short memories. It is where the rate was in the late
1960s and early 1970s.Professor McDonald says only at that level should wages now pose a
threat to inflation. Only at an unemployment rate of 2.5 per cent
would it be literally true to say that Australians were fully
employed.But surely the Reserve Bank needs to push up interest rates when its
board meets today in order to contain the inflation we’ve got right
now, I asked him on the phone last night.It doesn’t, because interest rate hikes are designed to tackle wage
inflation, which we don’t have in most of the country, he replied.The inflation we do have right now is fueled by climate change (higher
energy and water prices), a worldwide food shortage (higher grocery
prices), higher oil prices, higher rents and the mining boom.Higher interest rates will dent none of these.
But they will crunch the economy and push people out of work.
For no reason, in Professor McDonald’s view.
We will have abandoned the quest for a 2.5 per cent national rate of
unemployment just when it was within our reach.As it happens the ACT’s unemployment rate has already fallen to 2.5
per cent. Inflation here is no worse than it is in Melbourne where
the unemployment rate is 4.5 per cent.Professor McDonald might be right.
If he is, our Reserve Bank is about to make a tragic mistake.
Cross-posted at PollieGraph.
One point about the NAIRU is that it is not fixed. Structural changes in the economy can lead to a higher or lower NAIRU. As a general rule, anything that increases competition in factor markets will lead to a lower NAIRU (that is to say, the economy will be able to go faster for longer without as much of a risk of inflation). So in the medium term, you fight inflation by opening up factor markets.
Wood makes the point in his editorial that moves to protect Australian industries from the slings and arrows of international competition and moves to increase the protection of employees are both counter productive to the medium term aim of reducing inflation. And it’s a valid point. Ultimately raising the demands on employers will do more to increase inflation than the barely-more-than-bracket-creep tax cuts we are getting in July. And Kim Carr’s bone-headed approach of handing out free money to ineficient industries (automotive, textiles) will add to the problem.
In the short term, the only things that government can do to fight inflation are to raise interest rates or the GST, or increase income and corporate taxes to reduce aggregate demand. These tools would work (although the tax options would take forever to work their way through the political process - an advantage of interest rates as a tool), but there will be pain. And the pain will always be felt more keenly by people on the edge. There’s no way around that, unless government goes into the business of guaranteeing people’s mortgages. Doing that would raise tremendous moral hazard issues (’why not borrow $700,000? If I get in trouble, Kevin will bail me out’) and would ultimately have massive negative effects.
Mark, to directly address one of your points. The fact that the people have taken the biggest risk (i.e. the biggest mrotgages) will suffer the biggest losses does not imply that anyone thinks they are ‘morally at fault’. It is simply a fact of life - you take a big risk, you could get a big reward, or you could get burnt pretty badly. The RBA is not punishing anyone, it is simply trying to reduce demand in the economy as a whole. There are some people who have been flying very close to the sun, and their wings are pretty susceptible to any change in circumstances.
I don’t see the people who are having to rely on charity for food packages to sustain their mortgage payments, as reported on the 7 30 report last night, required, as having taken a “big risk” looking for a “big reward”. They were just trying to buy a house.
Not everyone is heavily geared because they’ve bought investment properties or they have margin loans for shares, or whatever. With the prices of everyday goods such as petrol, food, schooling, health, etc. on the rise and rents going through the roof, a lot of people are borrowing just to live.
Mark,
Without wanting to appear to be a ‘deeply [non] compassionate … priest of the temple of economic orthodoxy’, I will admit that I think that some of the people who are now struggling to live, let alone pay off their mortgage did take a ‘big risk’ given what they could afford. Maybe they just couldn’t actually afford to buy a house. Not everyone can.
I’ll get all kinds of abuse for this, but I’ll say it anyway: if you went and got a mortgage a couple of years ago thinking that interest rates would stay low, you were stupid. Sure, you may have been misled (well, lied to) by Howard, but you were still stupid.
That doesn’t mean that I don’t think that it is terrible that people are forced to go to welfare agencies just to survive. I think it’s awful, and I thank my lucky stars that my rent has only gone up 5% a year for the last couple of years. But ultimately policy makers have to do what is in the best interests of the community as a whole - some people are always going to suffer. Poor people suffer more. Poor people who have made bad decisions suffer the most. ‘Twas ever thus.
‘Tisn’t ever thus, Required, if the measures the Reserve is taking are ineffectual or counter-productive. I note that you haven’t addressed the points made by the two economists Martin cites in his column.
But where is the evidence that wage demands on employers is remotely responisble for the current inflation?
The reality is that people’s wages and salaries are not enough to perimt them to buy or rent houses in areas reasonably close to employement and servcies ss it is.
As for the ‘big risk takers’ spare me please! It used not to be thought that borrowing money to buy a house or flat to live in was a particulalry risky form of behaviour, if you had a job and income to cover the repayments. Lest we start on the semantic slippery dip too soon, those whose incomes are tied to fat bonuses (tens and hundreds of thousands and millions of dolalrs) and who leverage that expectation to enable purchases of multi million dollar houses in desirable areas, should not be put in the same category as someone who borrows as much as s/he can in order to put a roof over their heads in a place which they can afford to live amd which doesn’t require them to spend an additional two to three hours a day travelling to and from their place of employment.
I can already hear and read the semantic nonesense (Alan Woods is a prime offender but he is not alone) that conveniently elides the needs and desires of the average punter, with the ‘kids’ as he calls them who infest the higher reaches of the finance sector. Personally, I couldn’t give a rats if the expected bonus fails to materialise and the million bucks is not available to cover the years mortgage payments. However the politics of ordinary wage and salary earners not being able to afford decent and secure accommodation is a very different thing, and politically, any government who fails to make the kind of distinctions that the likes of Woods are paid to ignore and if necessary hide, won’t be sitting on the Treasury benches for long.
I have often asked the rhetorical question, and I am going to repeat it. Is there any economic alarum and excursion of the past thirty years, which can’t be blamed on the ordinary wage and salary earner’s desire for a decent and secure life, and whose ‘cure’ does not require ‘pain’ from those whose misfortune it is to be merely one of a multitude or ordinary mugs?
Well is there?
amused asks:
Prof. McDonald in the column answers:
Hmmm. Clearly, I’m not an economist, but I’m a little bit skeptical of McDonald’s argument.
If you increase interest rates, people with existing loans will have less money to spend on other things, and others will choose not to take out loans, and put money into savings that would otherwise have gone elsewhere.
Therefore, less stuff will be bought.
Maybe the prices of global commodities won’t be affected much, because Australia’s demand is a piddle in the ocean. But for goods that aren’t global commodities, if there’s less money available to buy stuff, the price should drop. Hence, overall, less inflation.
Rob, but the question is whether consumer demand is actually driving inflation.
From Crikey today - Adam Carr, senior economist with UBS:
Mark,
When I said ’twas ever thus’, I was referring to the fact that whenever something bad happens, poor people do worse than the rest, and poor people who make bad decisions fare the worst of all. RBA policy doesn’t change the fact that it sucks to be poor and bad decisions will bite you.
As to the economists cited by Martin:
Hughes is right - there probably is more than one NAIRU. In WA and Queensland the high price of exports leads to a ower NAIRU than in the other states. And he is right that the NAIRU changes over time - that was my point about competition in factor markets and structural change in the economy.
The argument from Hughes’ point would be that we should have variable interest rates - higher in WA than in Tassie, for example. Or higher for credit cards than for productive investment in new capacity. Back before bank deregulation,the central bank used to play a more interventionist role in deciding who got access to money. These days, that’s just not practical - with open borders there are so many sources of funds that it just can’t be done. So Hughes’ article underlines the fact that interest rate manipulation is a blunt instrument, but doesn’t make a case for not using it.
I don’t have time to read Ian McDonald’s paper (as an aside, he was my Macro lecturer back in the day). But I don’t agree with all of the statements that are attributed to him in the Martin article. Specifically, I don’t think inflation is solely down to world factors (climate change, the mining boom, rising oil prices and a worldwide food shortage). Those factors are all important, as is China’s fixed exchange rate, but the fact that real wages have risen in Australia so much over the last 20 years is an important part of the story.
Nor do I agree with McDonald that interest rate rises ‘are designed to tackle wage inflation’. Rate rises also have an effect on consumption (i.e. demand driven) inflation. For example, I heard something on AM this morning about falling turnover in the cafe and restaraunt sector over the last couple of months. This is probably due (at least in part) to rate rises and expectations of rate rises.
As for McDonald’s estimate that the NAIRU is actually 2.5 per cent, I’m not convinced. It seems a very low number, and he would be one of not many economists who sees that as a reasonable estimate. Unfirtunately I doubt we’ll get a chance to test his theory, at least in the next 5-10 years. This is probably as good as it gets for unemployment for a while. That’s a pity, but it’s better for the community as a whole than runaway inflation.
Given what he says about the causes of present inflation (which is surely correct,) I am interested in Professor McDonald’s view of the tax cuts. I have been wondering why there has been not more challenge to the economists’ view that a tax cut, which only represents bracket creep, and is going to be eaten up in higher petrol and food bills anyway, is somehow going to help overheat the economy.
Also, Gittens estimated (http://tinyurl.com/35xsc7) that even if Rudd increased the surplus to 2.3% (way above the planned 1.5%), it probably would only be the equivalent of a .25% rate rise. And to achieve that, the government is presumably employing significantly less people who may find it harder to get work elsewhere because of the Reserve Bank. If Gittens is correct, it makes the budget pain we are being warned about quite the waste of time, doesn’t it?
There are surely still times in the which bulk of economists make the wrong call, and I suspect this may be one of them.
Mark wrote:
It’s going to get a lot worse than they think. With interest rates (and only interest rates) to play with as a financial lever, they run the risk of popping the property bubble rather than letting it slowly deflate. Think of the effect of rising unemployment, falling business investment, falling consumer demand and add into that rising defaults of mortgages and credit cards as people struggle just to hang on to their houses. It’s already happening in western Sydney (rental crisis my butt, no worries renting out there).
A lot of that extra employment in housing and construction is looking pretty shaky.
You only have to look at the rapidly deflating property bubble in the US to get an idea of what could happen here. We’ve been watching some spectacular property rises here in regional areas and in Brisbane, and wondering when this stupid game of musical chairs will end. Nobody can afford to buy those houses that went from $160,000 to $500,000 in 5 years with the magical addition of a new kitchen (whoop-de-do!). Wages effectively went backwards, where the hell did the money come from?
Here’s the link to Adam Carr’s story in Crikey today btw:
[link]
Required, you’re missing the point about the problems with a NAIRU-based approach to policy. That the NAIRU varies with microeconomic changes is not so much a problem (though in practice anticipating how much those changes will affect the NAIRU is hard). The problem is that it appears to vary with macroeconomic conditions; low actual unemployment creates a low NAIRU, and vice versa.
That means there is no unit root for the time series, so measuring that root is impossible - ie we can never know, even in theory, what the NAIRU is. That’s what Peter Martin is saying in non-technical language.
The other thing is that a NAIRU approach to monetary policy seems quite inconsistent with the loudly-trumpeted strict inflation targeting (”one target, one instrument”) approach that the RBA is supposed to be the great pioneer of. They’ve abandoned that framework just when, IMO, it’s the right one to use.
Mark: My point was something akin to what Required was making about the effect of interest rate rises on demand.
That said, I’m not convinced that tanking the economy to reduce inflation is a good idea; just that it’s likely to work to some degree, if not as much as in other circumstances.
Derrida derider,
Why do you say that the RBA has abandoned inflation targeting? Inflation is above the 2-3 per cent band, so they have raised rates. The media has been talking about the NAIRU since Turnbull caught Swan out in Parliament. That doesn’t meant that the RBA has changed its policy.
But it may not work at all, Rob, except by tanking the economy.
Consider food. People don’t need less of it because they have less money. Discretionary spending like restaurants and cafe meals might go down - but that throws people out of work and kills businesses. Meanwhile, the price of food in the supermarket isn’t determined by domestic demand, but by exogenous factors, so doesn’t fall (and overall it’s relatively demand inelastic anyway). But a lot of people have less to spend, and spend more proportionately on necessary goods. So… you get the idea.
That’s how things work if domestic consumer demand isn’t the prime driver of inflation where it counts.
This pessimism is vastly overdone. The economy has been roaring along and the Reserve Bank is going to the top off, which is what they are supposed to be doing. Regardless of what the cause of the current inflation is, higher interest rates will flatten consumer and business spending a bit, hopefully not too much, and inflation will come down.
If house prices come down, but not too much, that’s fine too. After all that they have gone up, you would expect that. Of course people who borrowed a lot to buy a house in the vain hope that interest rates would never go up or that house prices would never go down might well get hurt, especially if they are forced to sell. In this situation, it is the banks who lent too much to too many risky borrowers who are going to get really hurt.
Speaking of banks, I’d be having a close look at what exposure Adam Carr’s employer, UBS, has to the dodgy credit markets before taking his policy prescriptions as gospel.
The smartarse answer is split in twain depending on your circumstances.
If you are lucky this round not to suffer well the answer is to thank your lucky stars that you’re not about to get smacked by the Researve Bank. To question such things is to be well a bit elitist. What’s the problem dear? Have some more of the chardonnay Kool Aid.
If you aren’t lucky this time round, well of course it’s your fault. Or you’re suffering from class envy. Or you’re being a drain on the good taxpayer. Move along and don’t let your poverty offend us peon.
And thus all the risk is redistributed downwards, the trickle effect in full action as it were. Those in the position to change the system either ignoring the poor or harranging them to stay silent and know their place.
On the upside with all the social upheavell that will occur when the system stalls we’re due another Dickens.
“I don’t see the people who are having to rely on charity for food packages to sustain their mortgage payments, as reported on the 7 30 report last night, required, as having taken a “big riskâ€? looking for a “big rewardâ€?. They were just trying to buy a house.”
This sort of reasoning really loses me, because, as Required suggests, a house is an asset well out of reach of a large minority to begin with. It is a big reward and it’s simply too risky for some people to take on. If you can’t afford to eat, you can’t afford to buy your house! People who refuse to acknowledge this should not be assisted to continue unsustainable spending.
Housing in general is a different issue, but ownership? Menzies really did a job on us.
Here’s Ken Henry pouring a bucket an the Howard/ Costello “good economic managers” myth (from Crikey).
“We are seeing a third policy prescription come back and bite us now: rising interest rates and big cuts in the May budget because of Howard/Costello’s policy of limiting budget surpluses to 1% of gross domestic product and giving the rest away in tax cuts and middle class welfare when it should have been spent on upgrading skills, education and infrastructure through a co-operative approach, not politically-based antagonism.”
I might add: the housing crisis could be significantly alleviated overnight by removing the 50% Capital Gains discount on the sale investment properties. Another piece of economic dunce work from the last government.
Why discriminate in FAVOUR of totally UNPRODUCTIVE investments in 2nd homes? These guys were actually populist clowns, not “economic managers”. Always had the eyes on the votes, not the management.
Of course, it’ll be a tough sell to change. Probably irreversible, politically. So thanks Howard, for selling us down the toilet for a short, good time.
Investment in property provides rental accommodation, and keeps rents down. Unless the government is going to sink money into public housing - which it should - property investors are the ones keeping some of us out of the gutter.
Just out of curiousity does anyone know what the recent and/or current incomes of the 9 member Board of the RBA are?
The only one I know something about is the Corbett fellow whose annual salary a few years ago [the same year Woollies received a fine of several million dollars for price fixing while he was CEO] was just under $9 million. Can we really expect he and his colleagues, most of whom are very highly paid directors of major companies, to have any real understanding and/or life experience of what impact their decisions will have on most Australians?
Perhaps they might consider alternatives if they were able to envisage ‘walking a mile’ in the shoes of the recipients of the decisions based on their ‘wisdom’.
Am i right in thinking Australians have the highest rate of home ownership in the world? If so, is it possible that this is some reflection of the social history of our young nation and relatively recent land carve up? If so, is it likely that we have hit the peak of viable home ownership/rental ratio, and we may be moving into a pattern more reflected with longer established nations? (just asking here - i have no idea).
As I understand the history, Australian home ownership rapidly increased during Menzies’ time as Prime Minister, in no small part due to the policies of his government, as well as to the favourable economic conditions. I’m not sure what the figures were like before WWII, but I’m assuming they were more in line with other developed nations.
Id have thought negative gearing was sufficient incentive for investors - and sufficient to provide a boost rental accommodation, Klaus. In fact, wasnt it the impact on renters one of th reasons it was reinsitalled, after being briefly removed?
I don’t see why we should be further encouraging investor buyers to price first-home buyers out of a tight market.
Yes, you’re probably right. As for pricing first-home buyers out of the market, I think that is a concern, but my primary interest would be in keeping rents down and cheap rental accommodation in good supply because the truly disadvantaged will be affected dramatically by shortages and rental rises. First-home buyers are buying an asset, and it is not their right to buy property they can’t afford, whereas everybody has a right to a home.
I agree Klaus - and I think state and community action on affordable rental properties has to be stepped up. No other real solution. relying on the private market is not adequate.
I do, however, think that rents also tend to follow investment buying heat: prices up, mortgage payments up = rents up. So, there’s also a role for the market, and government might do well to stop interfering in it to effectively encourage speculation by investors in that sector.
Another take on the Reserve in New Matilda:
[link]
The way I understand it is this: rental yield is a large part of what determines whether people invest in property. Investors arrive when the rents are (relatively) high - reflecting demand - and the property prices are (relatively) low, or interest rates are low, so the attendant loans are easier to service. As more investors enter, prices rise but rents don’t, because there are more rental properties available. When prices (or rates) reach a certain point, those rents are not enough to justify investment, so investors look elsewhere. Because of this, rental properties become scarcer, and assuming that demand doesn’t drop, rent increases. So, yes, higher prices means higher rents eventually. But higher rents also means higher prices eventually as investment becomes more attractive. In the long run, everything is more expensive, especially in places with net population growth, like the capital cities. It is even worse in places like Sydney where there are two national parks curtailing expansion to the north and south.
The relationships between house prices, mortgage payments and rents is a complex web of supply and demand, which is difficult for governments to manipulate without negative effects somewhere.
I should probably add that, in spite of my objection to Mark’s position further up the thread, I think there is a great deal of merit in the actual post.
The New Yorker has a short but worthwhile article on the social and economic costs and benefits of home ownership: [link]
I can’t help but think that a significant portion of the increasing domestic demand is driven by the baby-boomer’s retirement. They’d be relatively debt free after presumably paying off their home-loans by now as well as having higher than expected nest-eggs after the recent years of asset inflation in both the real estate and stock markets (ignoring the last few months). The interest rate increases will do little to curb the spending of these people and may in fact boost it as it increases the return of the cash component of their investment portfolio.
We don’t have that type of problem in Melbourne where we have a real man running the show. Mr Brumby has decided that as of today all “farmland” around Melbourne can be put to the developers bulldozer.
This housing crisis is a stage we have reached - SG up above is right and it was always inevitable of course. But shallow pollies will take the easy way out and their developer mates won’t miss the opportunity to make a squillion in the short term while people slowly wake up to the fact.
Australians have this puny cardboard cutout cultural notion that they are born to be home-owners in a young growing nation.
Australia - meet the geometry of finite space. Say hello to the planet you actually live on. Or, better go overseas and see how people in real countries live.
Klaus, I see housing in terms of a social good not as a commodity first and foremost. It would be better if people anticipated adverse circumstances and changes in their capacity to service debt, but given the lack of public housing and the state of the rental market, there aren’t a lot of options around for those on modest or low incomes, and that needs to be addressed - as many of these comments do.
Btw, Fred Argy also questions the logic of the Reserve’s actions:
[link]
There was another economist writing in the business pages of The Australian today making a similar point to his and Carr’s. It’s interesting to see the “fiscal conservatism” orthodoxy Labor wedded itself to coming under question. But I’ll have more to say about this at greater length next week!
The shibboleth that inflation can’t go over 3% whatever its causes is sure coming in for some close scrutiny.
If oil were to jump tomorrow to $200 because of Bush invaded Iran; cigs & booze went up 20% because the anti-cancer people got their way at 2020; houses went up 20% because I let down the tyres on Brumby’s bulldozers - does any of that mean that the economy needed to be crunched. Doesn’t it just mean that people need to start spending more on public transport; smoke less and invest more on public urban amenity and buy more apartment furnishings?
It doesn’t matter how high Australian unemployment rises the price of oil will inexorably rise and rise and rise. Same goes for agricultural product. The economy for this stuff is global. Lifting Oz interest rates won’t put a dent in Asia’s demand for Australian fish, beef, wool, wheat, coal or iron ore.
Consumption may be cut domestically but our production will just be snapped up overseas. Prices will not come down. Company profits will remain the same. Or even lift if wages are depressed.
Must admit I do not understand this inflation thing. Can see the point of avoiding wild price rises - but chugging along at a bit of a higher rate for a while - big deal?
Yep.
It’s really interesting in a way to contrast the blindness of those who see Australia as some sort of bounded national economic space with the reality - particularly because the same economic theologians who’ve been preaching the wonders of globalisation don’t appear to get that inflation in this country can have causes outside it. It used to be said that governments no longer had as much control over the economic levers - is it now time for the wizards of monetary policy to wake up and realise they don’t any more either?
A lot of this stuff needs fixing on both the supply side and on the cultural front of consumption.
The problem isn’t that we’re running out of space, it’s that we’re running out of spacce close to some of the state capitals, and that there are restrictions on the level of density people already living there are prepared to have built around them - Save Our Suburbs may protect the character of their areas, but their actions do make it difficult to get more people into the area we’ve already developed.
One obvious way out of this nexus is decentralization - encouraging people who want the big house and whatnot to move to provincial cities - but despite the occasional television ad here in Victoria it hasn’t seriously been tried since Whitlam.
“Klaus, I see housing in terms of a social good not as a commodity first and foremost. It would be better if people anticipated adverse circumstances and changes in their capacity to service debt, but given the lack of public housing and the state of the rental market, there aren’t a lot of options around for those on modest or low incomes, and that needs to be addressed - as many of these comments do.”
Yes, housing is a social good, and I would argue a right, but house ownership is not. It is those on medium and low incomes who can’t afford to buy at all. My basic problem with addressing the needs of those with mortgages is that I don’t see why some should be assisted to gain an asset that many will never be able to achieve. Addressing mortgage stress risks becoming middle class welfare. To service a mortgage you already have to have a pretty solid income. I know many, many people who spend more than a third, and some up to two thirds, of their income on rent! And I’m not talking about people in penthouse apartments here, I’m talking about functional suburban apartments with an hour or more commute to work. We need to take the bottom out of this rental surge with more public housing and the introduction of real rent controls, not help people with average or above incomes to keep houses they can’t afford just because they thought they feel entitled to them.
“One obvious way out of this nexus is decentralization - encouraging people who want the big house and whatnot to move to provincial cities - but despite the occasional television ad here in Victoria it hasn’t seriously been tried since Whitlam.”
Governments need to offer incentives for major employers to move out of the centres. They also need to invest in infrastructure to make such a move easier for businesses and for individuals. The significance of the CBD as a business hub is one reason why residential demand is so high in places like Sydney. Some companies are already moving out because costs are high and they no longer need that proximity due to better communication technology etc.
You are assuming that noone on a low income has already entered the housing market. The surge in house prices began in around 2002 (give or take, depending which part of the country) so there are in fact many people on low incomes who bought before the big surge and at a time of low interest rates. So while I see where you are coming from it is not true that addressing mortgage stress only addresses the needs of the middle class.
Robert #37:
Kenneth Davidson has a good piece in the AGE today which addresses that, and other things:
so Robert you are right, except that the SOS are a blip on the radar compared with the actions of the Vic government, it sometimes seems they never met a speculator they didn’t like.
Helen: agreed, with the reservation that developers develop large blocks for a reason. People want to buy them in preference to small ones.
But in the inner suburbs that already have decent public transport, SOS are an issue - a planner friend of mine suggests they even have the perverse effect of encouraging suburban skyscrapers because if developers are going to go through planning battles, they’ll go through it for the biggest, tallest building that they think they can sell.
Su, that may be true, but I don’t see why people can’t relinquish their properties when they can no longer afford them. If my rent goes up to more than I can afford, I have to move: why are those who own supposed to be able to stay in what they cannot afford, and those who will never be able to own expected to move on, again and again? If people entered before the prices rose, then the value of their homes has risen and they will come out ahead even if they sell. My point is that people crying poor while servicing mortgages are making a choice.
I am stunned by how thoroughly co-opted we all are by the ideology of ownership. It explains a great deal about the viciousness of our rental system: clearly we still assume that renting is short term. For increasing numbers of people, it is not.
Required, the reason I think the RBA has abandoned its strict inflation targeting is that, given the lags in monetary policy, such targeting is supposed to be aimed not at current inflation but at expected inflation (about 18 months is the supposed optimum lead time). And so far we have no sign of a locking in of expectations through wages (real wages are absolutely flat in the big states) which would sustain the current inflationary spike, and we can anticipate some serious deflationary impulses coming through trade as an indirect effect of the US’ mismanagement.
To be fair to the RBA this is a tough time for them - it’s not easy to know what the right course is. But I reckon they’ve probably done too much, too late.
And Helen and Robert, I reckon enforcing smaller blocks in growth corridors is absolutely the wrong way to go about encouraging better land use. It leads straight to the worst of both worlds - huge, silly, energy-inefficient McMansions on tiny plots.
A much better approach is to try and internalise the externalities through land tax policies. Encourage those who are willing and able to pay the full price (including the transport congestion costs) of living out in the sticks to do so on a decent block of land, and encourage efficient use of land (ie medium density stuff - townhouses, small blocks of flats, etc) for the rest - which requires developers getting decent blocks of land.
Housing is one market that has failed spectacularly, and it’s almost entirely due to the ridiculous market-distorting combination of negative gearing and halving capital gains tax on investment property. Klaus K, you argument about investment in housing as a function of rent returns coupled with taxation incentives doesn’t wash: the majority of negatively-geared rental houses are (still) already long-built, and the fast fluctuations in rental return figures make a bit of nonsense of any theoretical claim that there’s a causal link between (current) returns and new builds. (Even worse - the taxation incentives drive incoherent developments that are counter-productive, see below.) That’s what economists will tell you - most of them have investment property and don’t want the tax fiddles removed, either - but the reality is that no-one invests in a housing project after noting that rents are high ‘at the moment’; they invest regardless of rental markets, with all eyes on the taxation advantages (along with all the other subsidies the building lobby can screw from the taxpayer, such as first home buyer handouts, fatal distortions of the kind Rudd’s just added to, by the way), planning to sell them to others who will take the rental risks. (And who likewise buy those new apartments not for rental return reasons but for taxation and capital gain purposes, anyway). That is exactly why there is a ludicrous mismatch of housing in Sydney right now, for example, and a ‘crisis’ in rental houses. There are plenty of high-end, new, inner city apartments around. But these are useless for families. Market failure in the extreme, solely sheetable home to fuckwitted tax policies that have disconnected fundamental economics - supply-and-demand, basically - almost entirely from sane building cycles, development policy and especially the house price market for first home buyers.
Negative gearing in particular isn’t just middle class welfare, it’s already-wealthy, multiple home owner welfare. Once upon a time the building industry generally and developers in particular, like any other investor, had to shoulder a share of the investment risk they took when they decided to build a new set of apartments (rather than invest in widgets). That’s supposed to be ‘free market’ theory, isn’t it: you assess the market for a product, put your wares out on a level playing field, and deserve whatever return you get. For some idiotic reason we’ve swallowed the bullshit of the big developers - gee, I wonder if political donations have anything to do with it - that, somehow, it’s up to the taxpayer to make things less risky for multibillion dollar developers. Make it easier to sell their product by subsidising it, via tax breaks. But all it’s essentially done is create a cock-eyed housing market unconnected from reality. It is insane that this has gone on, at exactly the same time as every other industry has had the mummy guv’mint market-distorting props progressively and aggressively kicked out from under it, with one of the few essential products whose market can least afford to be distortion-driven into catastrophic failure by such meddling. People need houses. It should be a straightforward supp-and-demand proposition for the housing/housing finance industry to supply them at a sustainably-serviceable mortgage price. Fuck’s sake, the moronic whizzkids of the ‘free market’ can’t even get this one right.
The reason it’s been allowed to happen is of course one long dishonest chain of self-interest, from politicians who benefit from developer money, elite pundit/economists who have a string of rental properties in their portfolios, unions donors whose members benefit (short-term) from the artifically-sustained frenzy of an overcooking building industry, and of course fair swathes of equity-rich middle class voters who get to become multiple house owners on the back of already owning one. I can think of no other product where this kind of self-perpetuating, hugely market-distorting wealth transfer process has been enabled so thoroughly by shit government policy.
So…if you want to have a go at the ‘luxury’ of home ownership, Klaus, then start with those who are being rewarded by the taxpayer for buying three, four, five, six properties that are, by and large, either already built, already part of the rental market, so effectively ‘non-productive’ in terms of housing shortages. Or, alternatively and increasingly, are built with only the scantest cursory consideration of the future actual rental market needs, the appropriateness of the build for the actual market demand (as opposed to the on-paper tax and incenbtive possiblities) - an even less productive contribution to the overall housing demand mix.
Oh, and if you all want to have an honest debate about housing polidy, then start by asking everyone who owns an investment property to put up their hands…and then politely exclude them from the discussion.
Yes I understand your point Klaus. For people of low incomes getting in on the housing market potentially represents a step up the rung of affluence not only for themselves, potentially, but for their children. Relinquishing that gain in terms of social mobility is hard.
Honestly, is there anything more pissweak than ALP state or local pollie confronted by a developer? I mean, you expect the Tories to be in bed with them - so surprises there.
One day, coming soon, the Greens will be the natural party of local government.
Apologies for bodgy sentence construction above. I’ll just add that I am mindful of my mother who, refused a home loan in the 70’s on the grounds that she was a woman, and working through the period before compulsory super, retired with no assets and is paying rent with only the pension for income. Equity in a house can be a safety net for people too.
“So…if you want to have a go at the ‘luxury’ of home ownership, Klaus, then start with those who are being rewarded by the taxpayer for buying three, four, five, six properties that are, by and large, either already built, already part of the rental market, so effectively ‘non-productive’ in terms of housing shortages.”
It is not a luxury, but it’s not a right either. From where I’m standing, the more investors in the market, the more likely my rent will stay down. The idea that yield doesn’t factor is bullshit. If yield is low enough, it doesn’t matter about tax incentives. I’m not saying that the situation has been well-managed at all, but I worry that all this focus on those who are already able to play the ownership game is leaving out those who never will.
Frankly I’m disturbed by what it means for the already marginalised that people assume everybody will one day buy a house, and should be helped to do so no matter how foolish their financial over-reach. At the same time the anti-development agenda means that housing will be pushed further and further out of reach with population growth and increased demand. If you put the two things together - anti-development, anti-investment - what does it mean for low-income renters? It offers them neither good rental conditions nor ownership.
And I’d prefer to have my generous and understanding landlord in the conversation on housing policy than those home-owners lobbying to prevent development in their exclusive suburbs and at the same time pricing me out of living within two hours of my workplace.
Su, people in your mother’s situation are exactly who I’m talking about when I say that we need to take the bottom out of the rental market and focus on housing from the bottom up with more public housing and with rent control policies. My partner’s mother will be in a similar position when she retires: she arrived here as a refugee about twenty five years ago, endured an abusive relationship and long-term under- and unemployment for years after that. Now she has full time work, but will never accumulate enough super to ease retirement, or earn enough to buy. When I hear people worry about making mortgage payments on their house, I think about her and those like her who could never have a mortgage to begin with.
“The idea that yield doesn’t factor is bullshit. If yield is low enough, it doesn’t matter about tax incentives.”
I have no idea about mass patterns, but on the basis of just having negotiated, on behalf of relatives, the purchase of a house which relatives of the relatives will live in for in effect a peppercorn rent, the tax incentives are indeed the chief investment goal and worth a great deal more than even market rent income could be.
When interest rates are making it difficult to buy property I would have thought home owners and home renters both end up in much the same pickle, ultimately.
Above all, I don’t like to see the housing crisis construed as a battle between owners and renters. In the end we are all paying the bank.
“Above all, I don’t like to see the housing crisis construed as a battle between owners and renters. In the end we are all paying the bank.”
It’s constructed in this way by the legitimacy our culture gives to ownership, and the flow-on effects into all other areas of the discussion. Ultimately, you are correct, but when I see otherwise intelligent people arguing that owners are under undue stress because of interest rate rises, it worries me, because in spite of the real difficulties these people face they are still purchasing an asset. I think it is easy to forget that there are private rewards springing from ownership, and thus suffering under mortgage stress is on a different level to being unable to afford your rent. I’m not comfortable being forced into complicity with developers and investors against owner-occupiers, but without some protection otherwise, that is where I find myself.
Klaus, I agree mortgage stress is on a different level to being unable to afford your rent, although the remedy in both cases is much the same - either give up your home, or tighten your belt. And I agree that owning your own home is an asset but I’m reluctant to simply call it a reward and leave it at that. Personally the psychological security, ongoing connection with the local community, and control over our own future is far more important to us than any capital gains we may or may not make if we ever sell and move, and it’s what we’re paying for. Is this an asset?
I think buying a house is like super contributions as it involves stepping up your present saving habits (before the mortgage I had very different ideas about how much money I needed to live) and it ultimately means the state needs to spend less money upon your upkeep.
Finally, the mortgage payments on my house in Melbourne are less than rent on similar types of houses in Parramatta. Klaus, I could apply your logic to this situation and conclude that Sydney residents don’t deserve sympathy, assistance or intervention into their predicament because they’ve taken the gamble of living in Sydney with its attendant risks and (reputed) rewards.
I didn’t say that those with mortgages didn’t deserve ANY sympathy, assistance or intervention, but that a mortgage does mean a lot of rewards as well - as you say, not just financial. It’s a different thing to expect to privatise gains and socialise losses than it is to simply expect to have a place to live, and be able to get to work from there. Stable housing is a social good; home ownership is no more of a social good than other forms of housing, but it is also a privately held asset.
There are lots of good reasons for buying a house, in fact it’s a wonderful thing to be able to do. You are very fortunate. In two or three years with some hard work and determined saving, I may be able to and will try to do the same. It’s just that I know lots of people who never, ever will no matter what they do, and I think that the remedy of tightening or relinquishing is going to affect them more than anybody who can afford to service a mortgage, myself included.
Also, I have no expectation that people should move away from their workplaces and families, only that they cannot, in many circumstances, expect to stay and also to be assisted to own.
Pardon me, I was possibly a bit unclear, Klaus and Laura.
I am NOT positing this as a battle between ‘home owners’ and ‘renters’. And it’s not ‘the banks’ that are in play as the revenue collector here, it’s the tax office, which means it’s the ‘public polity’ piggy bank. Home owners and negative gearing have nothing to do with each other. You can’t negatively gear your own home. As for rental yields, Klaus, the whole point of negative gearing is to make an annual putative loss on your net investment/rental property income (while of course building its capital value). That’s how you get the income tax back from…the public polity piggy bank (ie you and me). That’s the whole point: negative gearing is you and me, Laura and Klaus, paying Joe Two House to buy that second house, while Joe No House down the road can’t afford one (thanks in no small part to Joe Two House being helped by you and me to push the prices out of his reach…. Can you not see the immoral repugnance of this (let alone the market-distorting fiscal lunacy)? As to yields, Klaus…well, the only investment property owners who truly suffer as a result of fluctuating rents are those who rely on rental income to help service the mortgage month-to-month, and have no other equity (ie in their home) via which to tide over the ‘low rent’ periods’. In other words, only the marginal, single-investment property greedy-but-dumb-mugs who over-leverage themselves to buggery simply to join the rich-pickin’, tax-trimmin’ fun…and get caught out. In other words - as I have said - the whole current tax regime on housing is almost perfectly designed for the ‘houses owners’: those with solid equity in one (or increasingly-often several) house - including of course their home. It benefits no-one but them, Klaus; it exacerbates the large and growing generational/fiscal gap between the ‘no-houses’ and ‘multiple houses’…with those who own just one home waxing/waning on the resulting artificially high house-as-home prices to boot, depending of course on when they got into the market.
Meanwhile, as for the rental market: I’ll repeat what I said before: negative gearing has a very limited impact on new builds as far as they might be designed to respond to the actual marketplace supply-and-demand numbers that might affect your rents. Klaus, developers develop housing with a view to sell immediately, not fuck about with the rent market contigencies themselves, with the major ’selling point’ - often off-the-plan - being the tax and capital gain advantages. The real ‘product’ sold is, as such, a ‘financial product’ designed to minimise tax and accrue value, not a concrete rental property designed to fulfil a consumer demand. Both vendor and seller see it largely that way, which renders the potential rental return a very secondary, weak ‘new build’ market signal; which in turn is why the disconnect between the actual new rental property built in the last decade and what is actually needed has grown so acute, and is causing a crisis in affordable housing (rent or buy) for exactly the type of people least able to cope: low income family groups in established residential areas (closer to their place of work and long-established social mileaus than the new ‘from scratch’ developments out West, from whence they must deal, after the distorted local market has forced them out there to buy, with the exacerbating financial/social pressures of time/travel costs to and from work).
The houses they should be able to buy are being pushed beyond their grasp not by ‘anti-devlopment’ types like me, Klaus, but by third and fourth ‘house’ investors looking for somewhere lucrative to deploy their long established home equity leverage/income surpluses.
As for your solipsistic crack about Balmain and ‘anti-development’ types like me forcing your rental market prospects down the toilet…firstly, sod you. Second, as (I presume) a no-kids inner city renter you’re actually in the box seat, chum. There’s no shortage of rental housing suitable for you close to the city, and with the new b/s $6,000 annual tax break subsidy, your rents are likely to drop by twenty percent over the coming years, too, since - I suggest - that developers will define ‘low end investment rental property’ as mass-produced studio apartments (cheap cost-per-build) in easy-to-sell inner city locales, which will be snapped up by equity-rich Boomer investors wanting to a) buy into that juicy new ten-year tax break too, and b) at the end of it, own a very tidy little capitally-appreciated serviced joint for grand-daughter Stacey to bunk down in when she’s studying Law at Sydney Uni. All at taxpayer subsidised, near risk-free investment liesure that does almost nothing to address the real supp-and-demand shortages…while those people who used to be able to afford to bring up their family in Glebe/Annandale/Surry Hills in the ten houses where there are now sixty studio apartments (giving sixty wealthy investors access to a weholy-unearned tax refund from the public polity piggybank)…do the two hour commute from Fucksville.
Sorry, I do not mean to sound shrill…but what is happening is so goddamned obvious, and so goddamned morally reprehensible, that I cannot understand why any of you - renters, home-owners, house owners - can defend the massive transfer of wealth and housing equity underway. Underwritten by the taxpaying mug, FFS. It took several centuries for Man to overcome the crippling disparity in prospects between the hereditary landowner and the wandering landless/serf. Why we are so intent on undoing it is the space of a few generations has me buggered.
Unless they’re lying to the tax office about the amount of rent paid then the interest payments are not going to be tax deductible as paying peppercorn rent won’t qualify.
You might only have to pay half the capital gains tax on investment properties, but on your own home - the biggest investment that many people make - you pay no capital gains tax at all. That clearly helps the rich a lot more than the poor. Bringing in capital gains tax on the family home will also reduce a lot of the distortion, albeit at the cost of the government who introduces it….