NEG must be good

NEG must be good as both sides are criticizing it. Well done fellows!

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Innovation and exploitation

The Australian economy is fundamentally exploitative rather than innovative.

The problem with our type of economy is that what you exploit eventually gets used up and turned to waste. The Australian rich-list is dominated by miners and developers. Look at other countries and see who are their wealthiest – American IT entrepreneurs, Italian designers, German automotive engineers, Chinese trading magnates and Japanese industrialists. What do we do? Our wealthy become rich by digging up the ground or chopping up the land. Then we sell it off cheaply to foreigners anyway. There’s no skill in that, there’s no intelligence and there is no future either. But we are addicted to this lazy life of thoughtless exploitation. When Australia does innovate, what happens? If we manufacture, regular booms in commodity prices bring a rising dollar, killing competitiveness in our secondary industries. When the commodity boom ends, the dollar falls and our industry is ripe for takeover by foreign interests.

And our government is complicit in perpetuating this paradigm of exploitation, rabidly defending and promoting coal mining and the destruction of our environment while undermining and denigrating those who seek more intelligent solutions to the world’s problems.

Why we have the current house price crisis.

We need to explain why house prices have risen throughout Australia and why Sydney and Melbourne house prices seem to be out of control.

Interest rates

The main influence is interest rates. People will pay what they can afford. As interest rates have consistently gone down house prices have gone up. However, even though the home buyer can afford to repay larger loans with lower interest, the size of the required deposit rises out of proportion and the consistent growth in home prices has meant getting a deposit is blocking out many new home buyers.

Demographic change

The second influence is population growth. With a static population house prices would settle at some fixed standard and would move pretty much in fixed ratio with incomes. With population growth comes competition for the existing stock of houses. Not only is the population of Sydney and Melbourne rising but there is a change in the demographic. Home ownership is important to new immigrants from Asia, and not just one home but several. Some young immigrants from China came here as the children of wealthy Chinese. They have resources behind them and a desire to have the best. They also have resources to overcome the deposit gap.

Tax 

Negative gearing and CGT concessions are a strong signal to these buyers. Even if these will not actually make a person richer, the existence of these sanctioned tax avoidance mechanisms is attracting people to make certain investment decisions, even to make bad ones. For people who see homes as a store of wealth these are special incentives. Again, this goes to the special nature of the current home-buying demographic. As prices have continued to rise the investment decision is proven to be correct and entices another round of bidding up.

Overseas buyers

Overseas buyers may only be ten percent of total new home sales, especially apartments, but as many of these are remaining vacant, this investment is actually diverting resources from adding to the supply. Sydney and Melbourne are stand-outs because of their stature as ‘World Cities.’ The attraction of having an asset in such a city at a time when prices are rising at much higher rates than other investments can be a status thing for overseas buyers. Given the populations of countries involved dwarf the Australian population of home buyers there is likely to be some pressure on housing for some time.

The bubble

Is there a bubble? There appears to be a bubble in Sydney and possibly in Melbourne. Will it burst? If interest rates rose to what they were twenty years ago prices would have to come down but that is unlikely. It would cause such a recession that interest rates would drop back to even lower levels. It’s likely that the principal factors at play continue for some time. Overseas buyers will continue to try to buy property in Sydney and Melbourne. Those who have amassed wealth through tax-incentivised investment will continue to do so.

The oft-stated proposition that houses are ‘unaffordable’ is nonsense, as someone can afford them, or thinks they can. The statement that the problem is a lack of supply is partly nonsense because it cannot be used as a basis for policy. The number of homes within 10 kilometres of the city or with a harbour view or on a decent-sized block of land is fixed. So, what can be done?

Here are some policies that would work:

  • Reduce population growth
  • Remove the dual incentives for investing in houses as the only way to amass wealth – either CGT concessions or negative gearing has to go.
  • Increase taxes on unoccupied dwellings to remove incentives to buy property just for the capital gain.

Some policies that would not work:

  • Allow people to access superannuation to get a deposit
  • Increasing first homebuyer grants
  • Any policy at all that is aimed at the demand side