The Great Australian Dream is Fading Fast

Greg Barns

RARELY a week goes by without a headline about ever-rising house prices both here in Tasmania, and broadly across Australia.

The impact of this trend is to widen wealth inequality.

Brendan Coates, economic policy program director at Grattan Institute, recently told Business Insider Australia “wealth inequality is widening, basically because wealth is rapidly accelerating,” because of property investment.

Politicians and those with a vested interest in a rising housing market think it’s all about supply of housing. But it’s not, according to prominent Tasmanian economist Saul Eslake.

It is government polices, such as first home owner grants and a distorted tax system, that need be tackled if that wealth inequality is to be reduced.

As Eslake puts it: “The repeated pattern of governments giving ever-larger cash grants to first home buyers and the Reserve Bank cutting rates every time it looks like there might be large and widespread falls in house prices has become for Australian property investors the equivalent of what became known as the ‘Greenspan put’ was for investors in the US stock market.”

What Eslake is referring to is what happened when the United States Federal Reserve was run by Alan Greenspan and Ben Bernanke, a period from the late 1990s through to early 2010s.

There was, says Eslake, “the widespread belief’ in the investment community during this period that the Fed “would cut [interest] rates whenever the stock market fell, or looked like it was about to fall. This led investors to believe that they ‘couldn’t lose’, which in turn encouraged them to take on more leverage than they might have done otherwise, and to invest in riskier products than they might have done otherwise.”

The result of course was the 2008 crash, otherwise known as the GFC.

Eslake detects something similar in the Australian property market. He observes that “property investors have good reason to think that governments and the RBA won’t allow property prices to fall nationwide, which encourages them to take on more risk in addition to the incentives that the tax system provides for leveraged investment in property”.

The tax issue appears, sadly, a political no-go area when it comes to housing because of the cynical, dishonest and reckless scare campaigns run by political parties and some in the media whenever even the mildest reforms to abolish the current distortions that ramp up housing prices are mentioned.

In the last federal election, the Morrison government ran a disgraceful campaign against Labor’s mildly reformist push on negative gearing.

In a presentation last week to the Council to Homeless Persons, Eslake drew together the factors that are adversely affecting housing affordability.

The first of course is interest rates, including on mortgages, that are at record lows and which the RBA says will stay there until 2024.

While the RBA policy is right given the impact of the Covid pandemic, try telling that to those who can’t find a property to rent at an affordable price, let alone buy a home.

The second factor is the banking system has been both willing and able to lend for housing and there “appears to have been some relaxation in lending standards”, observes Eslake.

Then there are the state and federal cash grants to home buyers noted above, which “as always, these have ended up adding to the price of both existing and new housing”, and the federal government has thrown fuel on the fire by allowing withdrawals from superannuation, and providing guarantees for low deposit borrowers.

The scare campaign against reforming the negative gearing and capital gains tax machinery means it will be a while before any political party has the courage to do what is right for Australia.

So we have to add in the fact, says Eslake, that investors have come back into the market, “confident that their preferential tax treatment will remain intact whatever the outcome of the next election following Labor’s decision to walk away from the policies on negative gearing and the capital gains tax discount which it took to the 2016 and 2019 elections”.

Contrast this with New Zealand, where the Labor government of Jacinda Ardern has made sweeping reforms to reduce tax incentives for property investment, designed to cool that nation’s booming market.

While it is comforting for those who own their property — or a number of them — to read stories about how “hot” the market is, remember this fact: It is no good thing for a nation to be pricing low and even middle income earners out of having a stable roof over their heads.

Housing is a human right.

The political class should end policies that unfairly advantage property owners via the tax system and buckets of cash.

You can increase housing supply all you like but until these reforms are designed and implemented the wealth divide will continue to widen.

This article was first published in The Mercury on 10 October, 2021: https://www.themercury.com.au/news/opinion/talking-point-creativity-the-key-for-us-to-live-long-and-prosper/news-story/8447e869f64be40de1be6de5b3aeede4