Posts Tagged ‘Harley Dale’

Fox’s method of solving hen’s housing affordability

Tuesday, August 19th, 2008

Recently, we saw this article in the news media: First home buyer affordability still at 24-year low

“Affordability will only improve if all governments work together to remove the onerous tax burden and regulatory imposts on new residential construction.”

This quote was said by Housing Industry of Australia (HIA) chief economist Harley Dale. Is that a conflict of interest? This is the same problem that we mentioned before in News media contradiction regarding the Australian rental crisis?:

Rather, we believe that due to the way the human brain is wired, conflict of interests can often result in biased information, especially when the issue concerns money and wealth.

Asking the HIA for a solution to the housing affordability problem is the same as, in the words of one of our readers, asking “yet another fox to guard the hen house.” Basically, the HIA wants the housing affordability problem to be ‘solved’ by:

  1. Reduce government taxation burden on homebuilders so that there is a greater incentive to build homes.
  2. Release more land for housing construction.

What is the underlying assumption of this ‘solution?’ Well, this ‘solution’ assumes that there is a housing ‘shortage.’ But what if the assumption is wrong? In that case, this is what we said in Australian housing shortage myth,

When it comes to solving Australia’s housing problem, there is an entrenched superstition that makes many believe that there is a housing ‘shortage’ in Australia. This superstition has resulted in many proposed solutions to the housing affordability crisis that are completely useless, wasteful and counter-productive.

As we said, in that article,

In reality, the housing ‘shortage’ superstition is the result of an illusion. The illusion arises from the fact that there is a mismatch of housing demand and supply. In some parts of Sydney, there is an over-demand for housing, which gives rise to the housing ‘shortage’ illusion. In other parts of Sydney, there is an over-supply of housing (some of them brand new) that are unwanted.

Let’s imagine the government decides to remove all taxation burdens on builders and release all land for house building tomorrow. This will be a builders’ paradise. But will that be a home buyer’s paradise? If the government really do that, do you think the builders will begin a house building spree and solve the housing shortage and affordability problem? Well, consider one of our reader’s protests in Australian housing shortage myth:

Mis-investment, who wants to live on Paramatta Rd, especially where this building is, it’s on Parramatta Rd and miles from the city. Would you live there?

All the empty dwellings on the outskirts of the city are just mis-investment, they are overprice houses in areas where people don’t actually want to live or they can’t afford them anyway.

The context of this comment lies in the fact that there are a lot of brand-new apartments and houses in the outer suburbs of Sydney that remain unsold. They remained unsold because these brand new homes are undesirable for various reasons (e.g. too far from city, no transport infrastructure, etc.). Obviously, these builders are losing money because of insufficient demand for these homes. That could be a contributing reason for current recession in the home building industry.

Why are these homes undesirable in the first place? There are many reasons: lack of infrastructure development (especially transport), rising fuel costs that makes car ownership expensive, lack of amenities, far away from employment centres, etc. Worse still, look at the wasteful use of land in Sydney- lack of high-rise residential apartments even in places near the CBD. In Singapore, they have a population that is as big as Sydney squeezed in a land area several times smaller. It should be clear by now who had been sleeping behind the wheel to allow the situation to become what it is today.

Next, what are the many short-term solutions proposed by governments to tackle the home affordability crisis from the demand side? All the ‘solutions’ proposed so far involves boosting the ability of buyers to pay for the already exorbitant and overvalued prices of homes. Examples of such solutions include first homeowner’s grant, tax-reduced savings account and so on. These ‘solutions’ can be compared to solving hangover problems by supplying more alcohol for drinkers to drink their way out of pain.

So far, no government has the guts to propose a politically unpalatable way of alleviating this problem by encouraging further deflation of house price through a change in the tax regime. In fact, there are plenty of scope for further property price deflation. As Associate Professor Steve Keen said in Brace yourselves for recession, says Steve Keen,

I think something of the orders of 40 per cent of prices are simply financed by people’s expectations that the prices will keep on rising.

Well when this expectation goes, ultimately goodbye 40 per cent of the current price of houses.

The question is, which of these two would one want to be the trigger for property price deflation?

  • Changes in the tax regime

OR

  • Rising unemployment, rising mortgage rates, further unravelling of the credit crisis, economic slowdown

In Australia, we have a tax regime of fully taxing savings and half taxing speculation- interest income are fully taxed whereas there is capital tax exemption/concession for property ‘investment,’ negative gearing, etc. Such tax regime encourages people to speculate, fall deeper into debt and discourage savings, which is the last thing the Australian economy needs right now. If the government is unwilling even to alleviate the housing affordability crisis in the short term by changing the tax regimes, then Australia have to rely on an inevitable economic crisis to do that, which is more painful and a lose-lose outcome for everybody.