Labor flew into damage control this week after a moment of accidental candour from Clare O\u2019Neil on ABC Radio.<\/p>\n
Responding to questions about house prices, the Housing minister delivered what might seem a statement of the obvious about\u00a0the cyclical nature of the real estate market.<\/p>\n
\u201cWe see periods of very significant house price growth and then we see the market make a correction, and that\u2019s what we\u2019re seeing at the moment,\u201d O\u2019Neil said.<\/p>\n
That word has a specific meaning in relation to markets, however. A correction is generally considered to refer to a fall in prices of between 10 and 20 per cent. A deeper decline is known as a bear market, characterised by widespread investor pessimism.<\/p>\n
The mere use of the word was enough to make headlines, particularly in the financial media, and those hostile to the Labor government and its budget changes to the capital gains tax and negative gearing treatment of real estate.<\/p>\n
No matter that the minister went on to quote Treasury modelling that forecast the tax changes would cause only a slowing of house price growth by about 2 per cent below what it otherwise would have been, which she called \u201cmeaningful but moderate\u201d.<\/p>\n
No matter, either, that Treasurer Jim Chalmers later corrected her use of \u201ccorrection\u201d, saying she meant it only in the general sense of the word.<\/p>\n
O\u2019Neil\u2019s comment and the aftermath perfectly illustrates the government\u2019s dilemma \u2013 one that prevents it from touting the apparent success of its biggest reform. Labor must make the case that the tax changes in the budget will make it easier for first-home buyers to compete with property investors, knowing the political risks of any action that might reduce the wealth of those who already own homes.<\/p>\n
O\u2019Neil\u2019s choice of language was all the more problematic because it echoed what others were saying.<\/p>\n
The veteran finance journalist Alan Kohler, for example, a former editor of both The Australian Financial Review and The Age newspapers and long-time finance presenter on ABC News, also used the word in one of his spots this week.<\/p>\n
\u201cHousing is in full correction mode, with the [national] auction clearance rate down to a six-year low of 47.4 per cent,\u201d he said, citing the numbers for the week to last Sunday from the property data company Cotality.<\/p>\n
The number of houses put up for auction fell 10 per cent compared with the previous week, Kohler noted, almost a quarter of scheduled auctions were withdrawn and a half of those were sold before auction.<\/p>\n
\u201cSo, obviously, vendors don\u2019t want to take their chances with an auction at the moment,\u201d he said.<\/p>\n
Notably, the Cotality data showed the fall in auction clearance rates was most dramatic in the cities where prices had previously been growing fastest. In Perth and Adelaide, only 40 per cent of homes that went under the hammer were sold. In Brisbane, the rate was a miserable 33 per cent.<\/p>\n
The auction clearance rate is a leading indicator. When it plunges, prices inevitably follow. Historically, the pattern is that they decline between about 4 and 8 per cent, then after a year or two the market recovers and prices continue their general upward trajectory.<\/p>\n
\u201cWhat we need to see is house prices remaining flat for 10 or 15 years in order for incomes to catch up.\u201d<\/p>\n
The two most recent declines have been particularly large, says Cotality\u2019s research director, Tim Lawless.<\/p>\n
\u201cThe largest decline we\u2019ve seen across our combined capitals index was an 8.2 per cent drop in housing values from peak to trough, and that was between 2017 and 2019. The second largest fall was just over 8 per cent through the middle of 2022 to early 2023.<\/p>\n
\u201cWith that context in mind, a 6 to 8 per cent drop \u2013 or even more than that \u2013 it seems the historical precedents are already there. Arguably we\u2019re facing stronger headwinds now than were there for those previous downturns,\u201d says Lawless.<\/p>\n
Most of the banks and other big financial institutions are forecasting a smaller decline than that, although at least one, the United States investment bank Morgan Stanley, is tipping\u00a0 a 10 per cent drop \u2013 into correction territory.<\/p>\n
Many bank economists, as well as Lawless, nominate drivers other than the tax changes. A bigger influence, they say, is rising interest rates. The Reserve Bank has increased the cash rate three times this year, in February, March and May, each time by 25 basis points. Most financial analysts predict one or two more hikes before rates start coming down, sometime in the latter half of next year.<\/p>\n
Even before rates started rising, says Lawless, other factors \u2013 such as the declining affordability of houses, inflation, the cost of petrol, the Iran war and general unease about the state of the nation and the world \u2013 were combining to slow the market.<\/p>\n
\u201cOn our numbers, the market actually moved through its peak rate of growth, at least on a national basis, in October last year. Back then we were seeing national home values rising at 1.3 per cent a month. And it\u2019s been gradually fading since, to a flat result in May,\u201d he says.<\/p>\n
\u201cLooking at how the daily index is tracking, I expect our national index will be slightly down at the end of June, by about 0.2\u00a0or 0.3 per cent.\u201d<\/p>\n
His point is that the housing market was turning long before the government announced its tax changes. \u201cThere is definitely a bit of a pile-on [on] the budget,\u201d he says.<\/p>\n
Despite all the criticism, the changes are not particularly radical. They limit negative gearing for residential property investments to new builds and replace the existing 50\u00a0per cent capital gains discount with a new \u201ccost base index\u201d that adjusts for inflation and imposes a minimum 30 per cent tax on gains. The aim is to remove the advantage that property investors have over owner-occupiers, particularly first-home buyers.<\/p>\n
Existing investors will be grandfathered. Furthermore, the changes do not come into effect until July 1, 2027 \u2013 by which time, it is hoped, the other factors depressing prices will have abated. The cycle of interest rate rises is expected to be over.<\/p>\n
The weird thing is that the government has been so cautious in its defence of the measures, if not of the problem they are intended to fix.<\/p>\n
As O\u2019Neil said in that ABC interview, house prices had jumped 50 per cent \u201csince just before Covid\u201d in 2020.<\/p>\n
\u201cOur government is reacting to what we are seeing in Australia today, which is home ownership rates for young people falling through the floor. Let\u2019s not beat around the bush here. We\u2019ve got a broken housing market.\u201d<\/p>\n
Runaway house prices were not just hurting young people, she said, but were changing \u201cwhat fairness and equality mean in Australia\u201d.<\/p>\n
A report from the Grattan Institute last year set out the magnitude of this problem in disturbing statistical detail.<\/p>\n
Since the turn of the century, it said, the cost of housing had far outpaced wages, with the result that the price of a typical home had grown from about four times median income to eight, and nearly 10 times in Sydney.<\/p>\n
On average, it took 12 years just to save up a deposit.<\/p>\n
\u201cUnsurprisingly,\u201d it said, \u201chome ownership rates are falling fastest for younger people. Whereas 57% of 30\u201334-year-olds owned their home in 2001, just 50% did so by 2021. And just 36% of 25\u201329-year-olds own their home today, down from 43% in 2001.\u201d<\/p>\n
The decline in the ownership rate was even greater for the poorest 40 per cent in each age group.<\/p>\n
Housing was the major driver of increasing wealth inequality in Australia, Grattan said.<\/p>\n
\u201cSince 2003\u201304, the wealth of high-income households has grown by more than 50%, much of that due to increasing property values. By contrast, the wealth of low-income households \u2013 mostly non-homeowners \u2013 has grown by less than 10%.<\/p>\n
\u201cThe growing divide between the housing \u2018haves\u2019 and \u2018have nots\u2019 is largely generational.\u201d<\/p>\n
That fast-growing cohort of mostly young people unable to buy a home was doubly cursed by rising rents \u2013 up \u201croughly 20% in Sydney and Melbourne in the past four years, and by much more in Brisbane, Adelaide, and Perth\u201d.<\/p>\n
Since that report was published in March last year, Australia\u2019s housing crisis has worsened. According to figures from the Real Estate Institute of Australia, house prices went up a further 12 per cent nationally.<\/p>\n
So the market was due for a correction, but the government is keen to downplay the role of its policy changes. In that interview O\u2019Neil \u201cabsolutely\u201d claimed credit for making it easier for first-home buyers to get into the market but ducked questions about collapsing auction clearance rates.<\/p>\n
Likewise, another Labor frontbencher, Tanya Plibersek \u2013 usually one of the government\u2019s most assured media performers \u2013 stumbled through an interview on the Seven Network\u2019s Sunrise program, talking down the impact of the policy changes when host Natalie Barr repeatedly pressed her on whether the government wanted house prices to fall.<\/p>\n
\u201cWell, what we anticipate over time is not that house prices will continue to fall but that they will grow more slowly,\u201d she said.<\/p>\n
But the problem will not be fixed if that happens, says Matt Grudnoff, senior economist with The Australia Institute.<\/p>\n
\u201cWhat we need to see is house prices remaining flat for 10 or 15 years in order for incomes to catch up,\u201d he says.<\/p>\n
His hope is that the current cyclical downturn will not end in the same way as others have over recent decades, with investors re-entering the market and prices booming again.<\/p>\n
Because the government\u2019s tax changes make housing less attractive to investors, he says, \u201cI think this will actually, for the first time ever, have an impact and flatten out prices.<\/p>\n
\u201cThere are some people out there who will be upset by a flat housing market. They\u2019re the people making money from the current [tax regime]. But if we want home ownership rates to go up, then we need investors to sell up, and we need first-home buyers to be able to get into the market.\u201d<\/p>\n
There are more than 2.3 million individual housing investors, equivalent to roughly 10\u00a0per\u00a0cent of the working-age population, according to the Reserve Bank. Most of them are so-called \u201cmum and dad\u201d investors, who own only one rental property. Many people who do not own an investment property aspire to do so.<\/p>\n
The \u201cnarrative\u201d around wealth accumulation, says Andrew Saikal-Skea, an independent financial adviser, has long been \u201cthat if you want to get ahead in Australia, buy property\u201d.<\/p>\n
\u201cThere\u2019s been such consistent and such tremendous growth in residential property for so long that a lot of people really viewed that as almost a defensive asset. It\u2019s not a defensive asset, it\u2019s very much a growth asset.\u201d<\/p>\n
He believes the tax changes will alter that narrative.<\/p>\n
\u201cI think what this is signalling is that the government, the [tax] environment is not just going to be wildly supportive of continued huge property growth.<\/p>\n
\u201cAnd I think that change in the narrative is really contrary to the Australian story over the last 30 years, and that\u2019s probably more impactful than the actual economics,\u201d he says.<\/p>\n
Experts differ over exactly when and how Australian attitudes to housing shifted, from houses being places to live to becoming vehicles for wealth accumulation. In his Quarterly Essay on Australia\u2019s housing \u201cmess\u201d a few years ago, Alan Kohler nominated a date \u2013 December 23, 1999 \u2013 as crucial. That was when the Howard\/Costello government cut the capital gains tax by 50 per cent.<\/p>\n
It\u2019s true that this cut, in combination with the generous provisions for negative gearing \u2013 now undone by Labor\u2019s changes \u2013 coincided with the rapid escalation in house prices. But Kohler and other economists also cited other factors. Between 2003 and 2009, net migration tripled and has remained high since. Periods of very low interest rates also encouraged people to borrow more. And grant schemes for first-home buyers, brought in by\u00a0various governments, state and federal, Labor and Coalition, served to increase demand, while doing nothing to increase the supply of housing.<\/p>\n
Though the Albanese government has\u00a0sought to lay most blame on Howard\u2019s CGT cut of 1999, Grattan\u2019s report from last year argued that its impact is greatly overstated.<\/p>\n
\u201cThe value of these tax advantages \u2013 about $10.9 billion a year \u2013 is tiny compared to Australia\u2019s $11 trillion housing market,\u201d the report noted. \u201cInstead, the biggest problem is that housing construction in recent years hasn\u2019t kept up with increasing demand.\u201d<\/p>\n
Close to $11 billion is still a huge amount to be handing to investors, every year. And the claim that the problem is supply requires some clarification.<\/p>\n
The problem, says Grudnoff, is not a lack of housing, \u201cit\u2019s who\u2019s buying the housing\u201d.<\/p>\n
When he compared census data on Australia\u2019s population growth with the growth in the number of dwellings, he found that the number of houses was increasing faster.<\/p>\n
Over the two decades to the most recent census in 2021, he says, \u201cthe population increased by 34 per cent, but the number of homes increased by 39 per cent\u201d.<\/p>\n
More recent quarterly data from the Australian Bureau of Statistics, he says, shows the number of dwellings is still increasing faster than the population.<\/p>\n
Moreover, the average number of people\u00a0living in each household declined, from about 2.9\u00a0in the mid 1980s to 2.5\u00a0in the early 2000s. It has declined further since the pandemic, as more people have taken to working from home and want more space in which to work.<\/p>\n
Also, more wealthy people have second houses, and the number of Airbnb-style short-term rentals has surged.<\/p>\n
It comes back to that \u201cnarrative\u201d cited by Saikal-Skea: Australians want more and better housing per person.<\/p>\n
For that, Kevin McCloud and Scott Cam might be as much to blame as Howard and Costello. Their real estate makeover TV programs \u2013 Grand Designs and The Block \u2013 premiered about the same time as house prices took off. There are now at least a dozen such programs on Australian TV.<\/p>\n
About a decade ago, the noted Yale economist Robert J. Shiller \u2013 best known for having established the US benchmark Case-Shiller Index of housing affordability with his fellow economist Karl Case \u2013 produced a paper on what he called narrative economics.<\/p>\n
Economic decisions, he suggested, were infected by all manner of \u201cdeeply human phenomena that are difficult to study in a scientific\u00a0manner\u201d.<\/p>\n
One of the case studies he offered was the global financial crisis of 2007-08.<\/p>\n
The proximate factors that caused it were arcane financial instruments such as collateralised debt obligations and mortgage-backed securities, but essentially it came down to imprudent mortgage lending by financial institutions to people who could not afford it.<\/p>\n
But, said Shiller: \u201cA narrative approach to understanding the crisis might take us back further in\u00a0time.\u201d He went on to call out a couple of TV shows that had become wildly popular half a decade earlier, which \u201cdepicted individuals buying homes, fixing and prettifying them a\u00a0little, and then reselling them at a large profit\u201d.<\/p>\n
It was the public buy-in to that narrative of growing wealth through property that led to the \u201cliar loans\u201d, the dodgy packaging and sale of them and thence to disaster.<\/p>\n
The lesson is that solving the housing crisis will likely require more than change to the tax laws. It will require us to buy into a different narrative, such as existed decades ago, in which houses were homes, not positional goods or investment vehicles.<\/p>\n","protected":false},"excerpt":{"rendered":"Labor flew into damage control this week after a moment of accidental candour from Clare O\u2019Neil on ABC…\n","protected":false},"author":2,"featured_media":763222,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-763221","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/763221","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=763221"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/763221\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/763222"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=763221"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=763221"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=763221"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}