by Jesse Hermans
In an AFR op-ed this week , the Federal Member for Banks, David Coleman asks, “What Australian really wants lower house prices?”
Australian’s are obsessed with housing, he writes. Everyone is piling into bricks and mortar. The value of property is three times the value of superannuation! The value of all Australian land is three times the value of all companies listed on the ASX! Nobody wants the value of that “investment” to go down!
Coleman does not consider whether this is healthy for our economy.
Countries do not become prosperous from buying and selling land to each other. Land is an asset in which additional investment yields no additional supply. Pour money into land, it only drives up prices and affordability pressures. Yet, Australian land is worth more to us than all the publicly listed companies in Australia.
What actually drives prosperity? Productivity. Innovation. Efficient and sustainable use of resources. Countries become more prosperous when they produce better goods and services with fewer inputs. An economy where land speculation supplants productive activity is an economy doomed to stagnate.
Next Coleman touches on the contradictory dilemma of household consumption and household debt. He notes that household consumption falls as land prices fall. Then he warns about high household debt and precarious household balance sheets. He does not mention that these phenomena are two sides of the same coin.
When households increase their consumption due to rising land prices, how is that consumption financed? In the current climate, it is certainly not financed out of wage growth. Wages have stagnated. It no doubt comes from increasing household debt (which also happens to boost house prices).
Firstly, homeowners borrow against the increasing equity in their home to finance consumption, which is only sustainable so long as prices keep rising.
Secondly, when prices rise it means buyers are taking on larger mortgage debt. This in turn means more money in the hands of vendors (who in turn have to pay more as well to up-size in the same inflated market). Eventually this money makes its way into the hands of a vendor who keeps it, spends less on housing and more on luxury cars. A trickle down strategy of growth if there ever was one (and we didn’t even mention the banks).
The problems of high household debt and rising land prices are intertwined. So long as prices rise, household debt will continue to deteriorate, reducing household resilience and ensuring the next correction is a crisis.
Coleman’s op-ed deceives the reader that it is impossible to lower prices without economic catastrophe. He argues that prices cannot be lowered without the economy stalling. High prices must be maintained at all costs!
This only true if one is ideologically opposed to government intervention. We know that Coleman is not opposed to government intervention, as he supports the tax subsidies that maintain Australia’s eye-watering land prices.
Here’s a creative solution: as the Federal Government happens to be a currency issuer, it has the power to reduce household debt unilaterally by enacting a private debt jubilee. A debt jubilee could take the form of a citizen’s dividend, conditional on the repayment any outstanding debts first. Mortgages could be sustainably reduced, and the banks being significantly deleveraged by converting mortgage debts into reserves. Citizens dividends would also help offset any fall in consumption as land prices fall.
Coleman then draws a false comparison between driving down land prices and driving down superannuation.
Superannuation (unlike land) is not a zero sum game. My higher superannuation balance does not make superannuation “unaffordable” for you. Superannuation increases private investment in capital goods, improving productivity and output. In contrast, higher land prices are ultimately a transfer premium. Higher land prices mean a larger premium paid by the landless to the landed.
Finally, Coleman argues that if we fix the broken tax rules prices would fall, therefore we should not fix the broken tax rules.
You don’t leave cancer in your body when it is killing you. You cut it out and get treatment. Even if the treatment is painful in its own right. If the tax system wasn’t geared towards land speculation (e.g. the capital gains discount) changing the rules wouldn’t be necessary. Nor would have these absurd price rises occurred.
Coleman confirms that reforming Negative Gearing and the Capital Gains Tax Discount will improve housing affordability. Less capital diverted away from business investment, the owner-occupier share of housing increased, and land hoarding disguised as “investment” discouraged.
Why on earth would anyone want that?