House Prices: Mr Abbott sprinkles poisoned cheese for the ALP

There is lots of talk about Mr Abbott’s high praise for the joys of ever rising house prices.

Some are suggesting that Mr Abbott is insensitive to the fact that house prices bloated on household debt – secured by our taxpayer guaranteed banks borrowing off shore – are causing lasting damage to our economy and perhaps worst of all denying many young Australians the ability to obtain shelter without a lifetime of debt servitude.

They are are right of course but if the ALP are smart they will side step this bit of poison cheese laid out by Mr Abbott and make no promises to directly target the prices of existing housing.

No politician can win – and no politician will try to – with an argument that in any way could be construed as a direct policy to reduce the price of existing housing. End of story.

The only policies that makes any sense politically and economically and could be explained to the public  are:

  1. Reduce the cost of new housing by reducing taxes on housing ( including the GST), land use restrictions and when and how ‘users’ make a contribution to the cost of new land servicing ( end the “first user pays all” model of financing the development costs of new land)
  2. Reduce the growth of unproductive foreign debt by having APRA wind down to zero (from 35-40%) the use of ‘hot’ foreign “ZIRP” money and carry trade capital by our taxpayer guaranteed banks to drive the demand by households for debt.  This will cause mortgage rates to drift upwards without the RBA making any change to the target rate. There are plenty of ways a government can encourage economic activity without driving household debt through the clouds.

Both demand and supply are addressed by these policies but neither policies directly target the price of existing houses.

Sure they may eventually have an effect on the prices of some existing houses (most likely soften the rate of increase) but that is not certain and clearly can be denied as the objective of the policies.

The direct objectives of the policies are clear.

1.    Cut red tape and cut the cost of bringing new housing to market.

Very hard to argue against that proposition.

2.    Wind down the use of “foreign debt” for something as basic as building shelter for Australians.

Hard to argue that a rich developed country like Australia needs to mooch off the rest of the world to build its shelter. If some (i.e mortgage brokers) think that we should let some dopey foreigners take a bet on Australian housing they can do so via non-taxpayer guaranteed RMBS.   Without a taxpayer guarantee the rates on RMBS will be so high that they will not be inflating housing bubbles anytime soon – funny how having your money at risk cools even the hottest carry trader.

Sensible policies, that are politically possible and do not involve running into the cricket bat that Mr Abbott is flexing.

Come out and say you want to reduce the price of existing houses and you will be gifting Abbott a second term.

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Categories: Macrobusiness

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