Waking up from the housing nightmare


'The Aussie Home', by Chris Johnston

Let's face it: the Australian housing sector is a mess, with no easy solutions. The affordability crisis is entirely of our own making, but fixing it will require much more than the policies currently on offer from both state and federal governments — more land releases and subsidisation of infrastructure provision.

The problem is that real estate in all its aspects — from speculative construction of new houses to negative gearing, from renovations to the national sport of sitting back and watching the house go up in value by 10 per cent a year — implicates such a large proportion of the population that few governments have the courage to do anything that will either cool off, let alone reduce, house price inflation or call into question the national obsession with houses and what to put in them.

The fundamental issue is that real estate development, both commercial and residential, is now one of the driving forces of the Australian economy.

To a certain extent this has always been the case. But in the past — with the possible exception of the 1870s and 1880s in Melbourne, which ended in 1890s depression — the construction of houses, shops, offices and factories was one element of relatively balanced economic development, with the parallel growth of the agricultural and industrial sectors. Large scale private and public investment went primarily into the development of the country's productive capacity, while real estate represented a secondary circuit of capital, dominated, especially in residential construction, by small scale investment by owners or small builders.

Since the onset of global economic restructuring in the 1970s, Australia has witnessed a pattern of declining industrialisation, with occasional but short-lived revivals. In order to fend off economic decline prompted by changes in the global system of industrial production, which have affected Australia's old industrial cities in particular — chiefly Melbourne, Adelaide and, to a lesser extent, Sydney — state governments have encouraged the growth of the real estate sector as a means of economic development in its own right.

Hence state governments have liberalised planning laws, abolished the old planning agencies like the Melbourne and Metropolitan Board of Works, sold land on the cheap, facilitated big, controversial developments and so on.

Australians have been encouraged by Federal Government policy to borrow more and more to finance ever greater investment in housing. This has, in turn, stimulated the further disproportionate growth of the finance industry. The recent experience of the sub-prime mortgage crisis in the US should alert us to the risks of allowing that industry to become too powerful.

Australia has little public sector debt because we stopped spending public money on necessary public infrastructure. But private debt has spiralled out of control as we've been encouraged to invest more and more in housing. Negative gearing and burgeoning superannuation payouts have encouraged the purchase of rental and 'investment' properties, adding to demand while supply can't keep up. Tax cuts, interest rate decreases (now reversing) and easy credit encouraged higher borrowing, allowing the bidding up of prices.

A substantial amount of the Australian economy now relies entirely on the ever-increasing expansion of household debt — and on house size. Larger houses have to be filled with more goods. The technology sector dutifully plays its part, producing new consumer talismans like plasma screen TVs, which also grow ever larger. Thus the building materials and consumer goods sectors grow apace, providing jobs and circulating money through the economy.

But notice another trend — the state of Australia's current account. Most of those consumer goods come from overseas — China mainly — so our obsession with housing is helping to drive us further into deficit with the rest of the world. This consumer splurge is also destroying our environment and pumping more carbon dioxde into the atmosphere both here and in China.

We can now get some idea of the extent of the problem. It is not just Joe and Jo Suburbia that have a lot riding on real estate. Successive state and federal governments have built Australia's prosperity on debt-fuelled investment in real estate and in housing-related consumption. Taking the heat out of house price inflation is extremely difficult, because the whole system is based on the expansion of credit and consumption that house price inflation allows.

The solution to the housing affordability crisis includes a massive increase in not-for-profit affordable housing through state housing agencies and, more substantially, housing cooperatives, as well as improved metropolitan-wide planning processes that increase densities in ways that are acceptable to local communities (and some local communities may have to change their attitudes to acceptable densities).

Governments at all levels will have to take a more active role in metropolitan planning and development, rather than leaving it all up to the private sector. Governments must stop encouraging speculation in house price growth, through changes to tax policy. We need a moratorium on big commercial developments in the suburbs — how many more hardware, electrical goods and car accessory monster stores do we need? Instead these sites should be considered for residential development.

Above all else, what is needed to overcome Australia's housing crisis is the development of a mature, diversified and sustainable economy, one that isn't reliant on digging stuff up and selling it overseas so that it can be used to produce things that can be sold back to us on tick, to fill our ever bigger, ever more expensive houses.

Nationl Summit on Housing Affordability

Colin LongColin Long lectures in cultural heritage at Deakin University. He is an urban historian with interests in Vietnamese, Lao and Cambodian history and heritage, Australian urban and labour history, and heritage in post-communist societies. He is also the President of the Deakin Branch of the National Tertiary Education Union.



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Thank you Colin for this insightful article. It should be made compulsory reading for every politician -- federal and state. Your message deserves to be shouted from the roof tops and heeded by policy makers, lest we create an even bigger mess through short sighted quick fix measures that address appearances but not the real problem.

Peter Stork | 05 May 2008  

A very good article that breaks new intellectual ground. I come to a sharper policy conclusion than Colin, however.

The solution to such wasteful distortion is not to be found within the overheated housing sector itself - which simply needs to be cooled down - but in a massive buildup of public infrastructural investment in the fields of water conservation and renewable energy generation and reticulation (solar, wind, geothermal, tidal), and conversion to transport systems based on those renewable sources of energy. Such a massive industrial transformation would be effective in moderating CO2 emissions, the growing peak oil crisis, and our river systems and soils degradation.

It would also, in a classic Keynesian way, generate demand to compensate for the economic slump that slowing down an overheated housing sector would otherwise undoubtedly cause, for reasons that Colin well explains.

This refitting of the economy would require, above all, strong and visionary political leadership. The solutions to all these problems are there - why are no professional economists yet talking about them?

tony kevin | 05 May 2008  

One of the aspects that Colin identifies here but perhaps doesn't place sufficient emphasis on is the issue of negative gearing on investment property. Why does the government continue to subsidise the acquisition of investment property by people who are already owners of their own houses?

Brian Finlayson | 05 May 2008  

Thanks Colin. Negative gearing has enabled ordinary Australians to be so called beneficiaries in the high land prices. With this tax break people are under the impression that they are doing something productive and financing their own retirements. But in fact it is at the expense of future generations.

It will now take careful ethical and strong leadership to deal with this large scale land investment for speculation. Any scheme to scale it down and dump negative gearing will be seen as hurting the ordinary person, and a proper evaluation of the whole sorry mess will be politically hard.

We should remember that it is cheaper to build a house now than it was 50 years ago. It is the land prices that are creeping up. All the good things that we do as a society shows up in land prices. Good security, nice gardens and playgrounds, good amenities such as schools, hospitals and transport so much paid for with our taxes. So if you are in the land buying market to excess your recoup all your taxes in high land prices while most of society is left paying high mortgages, high rents and high taxes.

What is needed is a real tax shift from production and onto land and natural resources. Result will be a stronger economy with investments in real things to help production, no tax breaks and really paying for the use of the environment.

Anne Schmid | 05 May 2008  

Thank you for a clearly written article on a complex issue. Usually I do not pay much attention to the housing market, but I have heard of and read about so many instances of hardship over the last few months, that I'm trying to understand possible solutions.

Maryrose Dennehy | 05 May 2008  

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