What Abbott doesn't get about the housing market

Prime Minister Tony Abbott doesn’t understand the housing market, doesn’t care about housing affordability, and is therefore poorly versed on the issues facing Australia’s non-mining sector.

The housing market and the business sector are intrinsically and unavoidably linked. Neither operates in a vacuum; developments -- good and bad -- in one market inevitably spill over into the other.

The business sector, for example, pays our wages, which many of us obviously use to pay down our mortgages. Meanwhile, land prices are a considerable cost for most businesses -- they need floor space to sell their goods or new land to build or expand a factory.

If you are prime minister of a country you need to understand how this works. It’s basic economics and yet there is clear evidence that Abbott simply doesn’t get it.

His comments yesterday on the property market and housing affordability were a case in point.

“As someone who, along with the bank, owns a house in Sydney I do hope our housing prices are increasing,” Abbott said during question time yesterday. “I do want housing to be affordable, but nevertheless I also want house prices to be modestly increasing.”

I am sure that many readers will agree with this sentiment. But Abbott is charged with acting in the public interest; that is the standard by which he is judged. Unfortunately, rising house prices -- particularly the type of growth experienced in Sydney -- are neither in the public interest nor in the broader interest of Australian businesses.

High land prices are a crippling barrier for many Australian corporations. It’s a key reason -- along with high wages -- why Australian manufacturing continues to retreat. It hurts shopkeepers and department stores; any business that requires a physical location to operate is hampered by elevated land prices.

On an international stage -- where competitiveness is king -- Australian firms are often limited by their economies of scale. High land prices make it difficult to produce a sufficient quantity to get fixed costs down to competitive levels. Unfortunately, it’s too costly to buy new land and build a new factory, which means too many Australian businesses fall short of their potential.

Housing affordability is therefore a much broader issue than whether young people can afford to buy a home. But we also shouldn’t ignore that dynamic because home ownership is an important aspect of both intergenerational fairness and inequality.

“If housing prices go up, sure that makes it harder to get into the market,” Abbott said. “But it also means that everyone who is in the market has a more valuable asset.”

No part of that statement is incorrect and yet it’s such a narrow, limited view of what is an exceptionally complicated debate.

For example, rising asset prices -- by making it harder to get into the market -- increases economic inequality. According to the Grattan Institute, home ownership rates have fallen sharply over the past three decades. The largest decline has been within the 25 to 44 years old age bracket.

Australian home ownership rates by age cohort

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As a result, Australia’s $5.3 trillion property market is increasingly concentrated, which has effectively created a country of landlords and renters. Abbott may not be aware that he’s implicitly advocating in favour of greater inequality but that’s no excuse. These are fairly simple economic concepts that should be readily understood by a prime minister and his chief advisers.

Treasury secretary John Fraser is one of those advisers and perhaps next time Abbott might like to clear his comments with those better versed in the fundamentals. Fraser came out strongly against recent developments in the Sydney property market during Senate hearings yesterday.

“When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney, unequivocal,” Fraser said. “It’s certainly the case in the higher priced areas of Melbourne.”

Whether we have a bubble or not, the simple fact is that housing market hasn’t been this risky since the collapse of Lehman Brothers. Investor activity is already at an unprecedented level and poised to trend higher in the near term. The economy itself is facing its most difficult challenge in almost a quarter century.

But it should be clear by now that the problems with the housing market go well beyond short-term growth in the Sydney market. It’s a systemic issue characterised by banks taking on excessive leverage to boost their profits, inflexible housing supply and elevated land prices.

It undermines productivity and new businesses; it has made it almost impossible for Australian manufacturing to compete. In the long term this is an unsustainable economic plan but neither major party has proposed a clear alternative. We are, to our detriment, stuck firmly in archaic thinking.

Abbott doesn’t get this and that’s a big problem. Through no fault of his own he finds himself managing an economy in the midst of an unprecedented structural change. There is no room for error and he doesn’t have the political capital to weather an economic storm.

If there was any doubt about his credibility then consider the following statement.

“This government is trying to make housing more available, we’ve tried to make housing more affordable, and the best way to make housing more affordable is to keep interest rates low and stable,” Abbott said.

Unfortunately Prime Minister, low interest rates are a sign of an exceptionally weak economy. At no point in time, in any country, has a weak economy been the basis of an adequate housing affordability plan. The federal government -- as with its predecessor -- doesn’t have a housing strategy and, as a result, it doesn’t have an adequate economic plan either.