Both Are a Plague on Our Houses

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Today’s blog was pub­lished as a fea­ture “A lose-lose elec­tion for home buy­ers” by The Age Busi­ness. Click here to down­load this post as a PDF file (with charts).

Both Lib­er­al and Labor hous­ing poli­cies will make Aus­trali­a’s debt and hous­ing afford­abil­i­ty crises worse. The only dif­fer­ence between the two is how much dam­age they will do.Both par­ties have promised tax-advan­taged sav­ings sys­tems that will enable First Home Buy­ers to accu­mu­late larg­er deposits. This will undoubt­ed­ly help them com­pete with oth­er buy­ers in the hous­ing mar­ket, but a lack of com­pe­ti­tion amongst buy­ers isn’t the prob­lem.

The real prob­lem is that we’ve dri­ven house prices far too high, by devot­ing far too much bor­rowed mon­ey to buy­ing hous­es. By increas­ing deposits while doing noth­ing about loans, both par­ties will only add fuel to the house price fire.

The ALP gives the exam­ple of a two income fam­i­ly, earn­ing aver­age wages, who could increase their deposit by $18,000 as a result of their scheme (and the Lib­er­als scheme is much the same). That looks good on paper.

But with­out any change to lend­ing poli­cies, that larg­er deposit will sim­ply be used to secure a larg­er loan–up to $360,000 larg­er, if Mr & Ms First Home Buy­er attempt­ed to buy a house with a 5% deposit. Of course, no lender would offer such a loan–because even with an 8% home loan rate, inter­est pay­ments would con­sume 140 per­cent of their gross income. But in the cur­rent hous­ing mar­ket, they could eas­i­ly be offered an inter­est-only loan equiv­a­lent to 85 per­cent of the pur­chase price, with repay­ments of 47 per­cent of their income.

And what would that do to home afford­abil­i­ty? Make it worse, of course. A fair slab of their increased pur­chas­ing pow­er would be eat­en up by yet high­er prices, dri­ven by ever high­er house­hold debt. The Lib­er­als scheme is even worse, because it adds three more logs to the house price fire:

  • It allows rel­a­tives to con­tribute up to $1,000 a year to the sav­ings account;
  • It lets rel­a­tives take an equi­ty stake in the First Home Buy­ers house, with­out being liable for cap­i­tal gains tax on its sale; and
  • It promis­es to use future gov­ern­ment sur­plus­es to top us these sav­ings accounts.

We have already achieved the world’s most unaf­ford­able hous­ing with loans that are based sole­ly on the incomes of the bor­row­ers. This pro­pos­al would throw par­ents income and gov­ern­ment sav­ings into the mix, and there­fore push mort­gage debt beyond its already astro­nom­i­cal lev­el. It’s a sil­ly step towards the mad­ness that marked the peak of Japan’s ill-fat­ed Bub­ble Econ­o­my in 1990, when lenders briefly offered 99-year mort­gages.

We thus face a choice between a bad hous­ing pol­i­cy, and an almost insane one. I hope that nei­ther rep­re­sents what either par­ty real­ly thinks is need­ed, but is instead a prod­uct of this “me too” elec­tion cam­paign, where each side is afraid of sug­gest­ing a pol­i­cy that can be “wedged” by its oppo­nent.

With both par­ties offer­ing us a Hob­son’s Choice on hous­ing in this elec­tion, the best we can hope for is that who­ev­er wins ditch­es their cam­paign promise, and instead devel­ops a pol­i­cy that restores some par­i­ty between mort­gage debt and income–perhaps by lim­it­ing loans to some sen­si­ble mul­ti­ple of the rental income that a house can be expect­ed to gen­er­ate.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.