Housing reform needed urgently to get Australia building

November 27, 2012, 11:00 am Michael Pascoe Yahoo!7

With home prices bottoming, is Australia building enough new homes to ensure we don’t return to another crazy property price surge in the near future?

After decades of concern about housing bubbles, it seems a little weird that the Reserve Bank of Australia now is hoping the housing industry will take off and take off soon. The sustainability of Australia’s record run of unbroken economic growth is depending on it.

Just as weird is that Australia’s investment in housing has been flat or worse for so long now. The federal government is betting its economic growth forecasts for the next financial year on that changing, but RBA governor Glenn Stevens last week admitted that the reason for our lack of building is a bit of a mystery.

In a speech worth reading for its overall perspective of the economy, Stevens held out the hope that, as the mining boom matures, dwelling construction was an area of stronger potential demand “which has been unusually weak”.

“It is not clear, actually, that the degree of weakness has been adequately explained,” Stevens said.

“Various explanations have been offered – interest rates too high, housing prices falling, zoning restrictions, planning delays, construction costs, lack of ‘confidence’, all have featured. At present, at least some of the preconditions one might expect to be needed for higher construction seem to be coming into place. Interest rates have declined, dwelling prices seem to have stopped falling, rental yields have risen, and the availability of tradespeople is assessed as having improved. We have, moreover, seen a rise in approvals to build. So there is some evidence of a turning point, albeit a belated one.”

Of course the RBA doesn’t want housing prices to soar – that would bring out the interest rate cudgel again - but it would be quite happy to see them ticking up by the inflation rate or a little more to put some confidence back in the market and provide the incentive for builders to get a-building and buyers a-buying.

I’ve never been a fan of the real estate spruikers when it comes to talking up housing investment properties – most Australians already have a major investment in residential real estate (their home) and would do well to diversify into solid, dividend-paying shares – but it does alter the game a little when our official inflation watchdog effectively announces it wants more housing built and it wants it now. For a start, it reinforces the view that interest rates certainly aren’t rising any time soon and will probably ease another notch.

Governor Stevens summarises the main obstacles and encouraging signs well in that single paragraph quoted above. It does in a few words what a Council of Australian Governments study on housing supply and affordability took 41 pages to achieve after two years’ work, but I think he underplays in passing the importance of the market coming to the conclusion that the housing market has bottomed.

It’s not just a matter of “housing prices falling” that has the industry weak, as, by itself, it follows that at some point they fall far enough to look cheap and encourage a whole pile of buying – that’s the whole point of the market mechanism. I think it’s a bit bigger and more complex than that.

We have been in recovery mode for some years from an extremely strong rise in housing prices. The peak happened in different markets (both by geography and price range) at different times and a few areas (e.g. the Gold Coast) had crazy speculative bubbles to make it worse.

On the way up, both of the fundamental motives of fear and greed were working to push housing ever higher: greed in that “you couldn’t go wrong” buying bricks and mortar and it seemed so easy to make money; and fear that if you didn’t jump into the market and buy something, you might never be able to.

Once prices stopped rising, both the fear and greed factors evaporated. With prices coming off a bit, they started working in reverse.

As usual, we tend to lose perspective about the housing correction. Some suburban markets are off about 10 per cent from their peak – but they had been up by 100 per cent over the few years leading to the peak. It was that crazy rise, not the correction, that was dangerous.

That’s no comfort for those who bought at the top of the market – someone always does in every market. There should be some comfort for them now though with the RBA governor part of the housing cheer squad instead of warning about its dangers, as he did on Sunrise two-and-a-half years ago. The consensus is building that prices for all but the luxury end have indeed bottomed.

There is more to it though than sniffing out some price rises. To help make the housing industry recovery work, much remains to be done, especially in the areas of planning and taxation. The COAG study explains most of the problems, but went rather gently on the perpetrators as they are the federal, state and local governments. It’s becoming too important to be stymied by weak-willed politicians.

More from Michael Pascoe:
Forget Europe and the US, start worrying about Japan
Australia's stronger immigration - the other inflation dampener
States and retailers fooling themselves over GST

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17 Comments

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  2. robert01:08am Saturday 01st February 2014 ESTReport Abuse

    lm just a simple person,yet with halve a brain, also holder of property, THE tax neg/gearing puts the investor wel out in front, Residenal property being one building or home on one block and title. must be revised and removed from neg/gearing. just think about it. new homes open new estates, multi units remain neg/geared , famillys will no longer compeat with investors. just commonsence dear policy maker, win, win

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  4. Eric01:50pm Thursday 31st October 2013 ESTReport Abuse

    Encouraging people to buy NEW direct property in their superannuation is one way to stimulate the building industry and increase the shortage of rental properties. We recently bought a property in our super with Future Assist SMSF. We are providing jobs for builders and a place to rent for a family. Everybody wins!

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  7. Rezwan Khan03:30pm Friday 03rd May 2013 ESTReport Abuse

    the first home buyer tax incentive is a lump sum amount with a waiver of the stamp duty. This equates to about a maximum of 20 grands. While the owner of the investment property can easily reap a tax benefit of about 15 grants almost every year. It is a policy designed for the rich by the rich to support the rich. I agree with the super scheme. this is where the money is given to some insurance company so that they can have a huge bite and relax in peace. If you are wealthy, you can arrange to have a self managed super fund. Not worth for an average individual. Again a policy designed for the rich by the rich to support the rich.

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  8. Brad01:25pm Tuesday 19th March 2013 ESTReport Abuse

    Dear Julia, Please get rid of stamp duty. As I'd love to move my family into their own house this year.

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  10. Grant04:05pm Wednesday 06th February 2013 ESTReport Abuse

    What is really needed is realistic housing prices, not the inflated ones we currently have in Australia. How can housing at over 8x average salary be a good thing for Sydney (or over 6x for Australia overall)? Especially when globally accepted affordability ratio is 3 times. These high prices are only good for housing developers and those speculating on housing. The government does not want lower prices, as owners (voters) will not be happy, so do everything to prop up prices.

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