ABC, The Drum – 10 June, 2015

By Michael Janda

http://www.abc.net.au/news/2015-06-10/janda-its-not-hockeys-job-comment-that-should-worry-us/6535484

Joe Hockey’s comment on “getting a good job” may have caused the biggest stir, but it’s his follow-up comments that we should be talking about, writes Michael Janda.

The Treasurer has been slammed for being out of touch with the “average Joe” for his latest comments on housing affordability, but the disconnect with economic reality is probably more concerning.

Joe Hockey’s advice that “the starting point for a first-home buyer is to get a good job that pays good money” was reminiscent of former PM Paul Keating’s quip to student protesters that they should “go and get a job”.

So far, Hockey’s comment seems to have gone down about as well as Keating’s, with both opening themselves up to accusations of elitism – in Keating’s case because unemployment was still above 8 per cent after the early 1990s recession he said “we had to have”; in Hockey’s because many 20 and 30-somethings are protesting, “We have a good job and we still can’t buy.”

However, other comments by the Treasurer on housing affordability are far more worrying from an economic perspective.

Hockey’s throwaway remark that “if housing were unaffordable in Sydney, no one would be buying it” makes superficial logical sense, but entirely misses the point economically and socially.

The point long argued by housing affordability advocates is not that no one can afford to buy in large swathes of Australia’s capitals, but that a large and growing number of residents can’t.

To borrow a friend’s analogy, just because some people are buying Lamborghinis doesn’t mean they’re affordable.

Housing finance figures out from the Bureau of Statistics around the same time the Treasurer was speaking show that, excluding the refinancing of existing loans, investors account for half of all new home lending nationally. In Sydney, that figure is about 60 per cent.

Clearly housing is affordable – for those investors.

And it’s no surprise that it is, with record low interest rates and the ability to take advantage of negative gearing so that other taxpayers help defray the cost of paying too much for an investment property where your rents won’t cover your interest bill and other expenses for years.

That’s not to mention the bonus of discounted tax on any capital gains you achieve when you sell.

In fact, it is precisely these advantages that have left the proportion of first-home buyers in the market around record lows, despite recent changes to the ABS methodology that bumped the figures higher.

Not that life is certain to be rosy for investors either.

Most of them are borrowing a lot of money and risking a lot of equity in other properties they already have to buy in the current hot market.

If house prices fall, or even just stop rising for an extended period, many will be left high and dry with large losses, and potential defaults.

That includes a large cohort of self-funded retirees and self-managed super funds who have bet their retirement on rising house prices.

That is why existing owners are terrified of home prices falling, a fear that the Government has been keen to capitalise on. As the Treasurer said on AM this morning:

 You can’t just have a range of different policies that smash house prices, which is what Labor wants. That is the wrong policy response. You’ve got to increase supply.

But this in itself is an economic contradiction.

The only reason that increased housing supply would improve affordability and, as Mr Hockey put it, “give people a better opportunity to get into the market”, would be because it lowers prices.

It is a fundamental supply and demand equation – more supply at a given level of demand should result in lower prices.

So the Government’s expressed solution to Australia’s affordability issues would also lower prices, but through a movement in the supply curve, rather than the demand curve.

The danger is that, during an asset price bubble, irrational exuberance can see investors soak up extra supply that is in excess of the real demand for accommodation.

Thus, prices keep rising despite the fact that more dwellings are being built than there are extra households to live in them. This is what happened for years in the US, Ireland and Spain, until the credit that was fuelling the speculative purchases dried up.

The best sign of a bubble is where the price of an asset fundamentally disconnects from the prospective income from that asset, meaning people are just betting on future price gains.

Gross rental yields – before expenses – on Melbourne houses are currently 3.2 per cent; in Sydney they are 3.4 per cent. Apartments are a little better, but still at very low returns in the mid-4s.

A look at the dwelling completion figures and population growth figures shows that new supply has roughly matched increased actual demand at a national level over the past few decades.

Thus it is little surprise that rents in most cities have been going nowhere lately, as the surge of properties being built ensures there is plenty of choice in the market for prospective renters.

The nation’s economic policymakers would be wise to think carefully before pushing Australia further into a housing supply boom that may end up resulting in the very price crash they are all desperate to avoid.

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