20 Sep 2021 Ian Verrender
Break out the lifeboats and prepare for a river of crocodile tears in the next few months as we gear up for a federal election.
It has become something of a ritual. Every three years, housing suddenly becomes a red-hot political issue.
We will, no doubt, hear promises from both sides — to help first home buyers via grants, handouts, and other subsidies.
The problem is, generally, that tends to make affordability worse. Throwing money at first home buyers only adds to prices and, instead, becomes a grant to those selling their property.
If we’ve learned anything from the past week, the Australian housing market is on a one-way trajectory into outer space and no one — neither the Reserve Bank through monetary policy, nor the government through tax reform — is in any mood to alter its course.
The June quarter saw the biggest three-monthly rise in national capital city housing values since the Australian Bureau of Statistics first began collating the data almost 20 years ago, with growth averaging 6.7 per cent.
With official interest rates likely to remain close to zero for the next three years, the sheer weight of money and easy lending are likely to continue, further fuelling the frenzied demand for real estate.
And once again, investors are re-entering the market, squeezing out new entrants.
Relations between our two main arms of economic management — the Reserve Bank of Australia and the federal government — appear a little frosty right now. And neither appears willing to take responsibility for the incredible spike in real estate, or to take any action on keeping it in check.
Last week, Treasurer Josh Frydenberg agreed it might be a good idea to conduct a review of the Reserve Bank, given it had consistently failed to meet its key inflation and wages targets for the past five years, although he admitted it had performed “very well through this crisis”.
The idea of a review was floated in a report from the Organisation for Economic Co-operation and Development — now overseen by former finance minister Mathias Cormann — on the Australian economy and follows widespread criticism the RBA had kept rates too high in the lead-up to the pandemic.
Later that day, RBA governor Philip Lowe, in a speech on how the economy was faring through the latest wave of COVID infections, batted away suggestions interest rates should be hiked to cool the red hot housing market.
Higher interest rates, he said, would certainly help tame housing prices. But it would come at the cost of “fewer jobs and lower wages growth”.
The graph shows the incredible amount of cash banks now are lending for housing, which explains the recent crazy price rises. And it’s clear investors are back in the game, lured by the whiff of easy capital gains.
Last week, however, the idea of macro-prudential controls didn’t even rate a mention.
There’s an inconvenient truth around housing affordability. While politicians love to splash money around during elections, there are only two effective ways to make housing more affordable — and neither come without problems.
Either housing prices have to drop, which can damage the economy and create havoc in the banking system, or wages have to grow faster than real estate, which can trigger an inflationary spike and cause a rise in interest rates.
The RBA is banking on the second option; that its ultra-low interest rates will spur employment and wages growth. But it’s hard to see how that will work alone, without the brakes being applied to housing investors or home loans in general.
Then the kicker. Housing problems were largely caused by factors other than monetary policy and need to be addressed elsewhere.
“The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transport networks,” Dr Lowe said.
In case you missed it, he was talking about government. If he needed any backup, it was in the very same OECD report.
Negative gearing and the 50 per cent capital gains tax discount had distorted investment decisions, it found, and encouraged Australian households to plunge into real estate.
The end result? Our household balance sheets are far too heavily exposed to property.
Fine sentiments. But there are only two chances those tax incentives will be wound back any time soon. None and Buckley’s.
The last federal election dealt a fatal blow to any chance of property market tax reform. With so many Australians so exposed to real estate — ATO figures suggest more than 2 million Australians own investment properties — the Opposition’s policy to wind back the tax incentives became an easy target for a government desperate for an edge.
Having been trounced at the election, the ALP has since dumped its real estate tax reforms, never to be resumed. That means the tax incentives are here to stay. And that means investors will continue to pour cash into residential property, driving prices higher.
Which leaves the ball in the RBA’s court. While Dr Lowe has rejected rate hikes to tame the market, there are other measures available to our monetary mandarins.
As the key member of the Council of Financial Regulators, the RBA was instrumental a few years ago in bringing property investors to heel. And, if it decided soaring housing prices were a threat to economic stability, it could do so again.
The banking regulator, APRA, also part of the Council, could be directed to rein in bank lending for real estate. It could insist on bigger deposits. Or limit the amount of interest-only loans banks could extend, as it did four years ago.
For years, the RBA rejected the use of these types of measures — known as macroprudential controls — arguing they didn’t work. But regulators were forced to adopt the measures twice, between 2014 and 2018.
As you can see from the graph, they worked with devastating efficiency. In 2015, investors came close to eclipsing owner-occupiers on home loans. But the limits on banks lending to investors and on interest-only loans, the most popular type of investor loan, forced a sharp reversal.
Many of the RBA’s critics tend to ignore its unique charter and obligations. Most central banks are tasked with just one role; to keep inflation under control.
The RBA, in contrast, has three mandates, each of them mammoth, that can run counter to each other. It somehow must keep the currency stable (by ensuring inflation ranges between 2 and 3 per cent), contribute to full employment and look after the prosperity and welfare of all Australians.
Housing has become a flashpoint for our economy, so you could argue that falls into the RBA’s third remit. But if it pulls the interest rate lever to take steam out of housing, that will impact its performance on the first two.
And if it is going to be the subject of an inquiry around its performance, it’s likely to stick with a strategy that will deliver on its core mandates. Clearly, it believes it is up to governments to do something about hauling back the tax incentives for property while it concentrates on inflation and wages.
The end result? All hands off when it comes to property.