Cash grab or about affordability? Terry Ryder

Bill Shorten and Labor are promising to perform a mathematical miracle in the real estate industry: they have a policy under which prices will keep rising but affordability will improve.

Labor justified its real estate taxation policy with the claimed desire to improve housing affordability. Shorten in his policy announcement essentially blamed all price rises over the past 30 years on negatively-geared investors and inferred that nobbling them would revolutionise affordability.

This has scared the living daylights out Australians who live in the 70 percent of households which own their homes. Labor was promising to reduce the value of their major asset.

Since Labor realised the fundamental flaw in its policy pitch, it has been at pains to claim that property values won’t fall under its changes. The ALP-aligned think tank, The McKell Institute, is now saying that house prices will keep rising under the Labor policy.

So Labor proposes to perform a statistical miracle. Prices will keep rising but affordability will improve. One wonders about the means they will use to achieve this. Other than lower prices, the only mechanisms for improving affordability are a big cut in interest rates (already at record lows and not controlled by the politicians) and/or a big rise in incomes (not part of the plan, as far as I know).

This confirms – yet again – that politicians collectively lack even a primary school understanding of how property markets work and how their blinkered policies impact on real estate consumers. They seem unable to think policies through to logical conclusions. They keep introducing laws which they claim will improve affordability but which make it worse – every time.

This is playing out at a state level, with the Governments in charge of the two biggest states slugging foreign investors with new taxes. They maintain that this will somehow make housing cheaper but sadly - yet again - it will have the opposite impact.

There are widely diverging views on affordability – how serious it is, what causes the problem, who’s to blame for prices rising and how to fix things. But one area where most parties tend to agree is that increasing the supply of dwellings would have a beneficial impact.

In fact, the best chance of bringing down prices at a local level is creation of an oversupply. As we have seen in selected locations around Australia in recent years, it’s the one major element that causes prices to drop.

Specific markets, notably inner-city apartment markets in some capital cities, are poised for a hefty rise in supply which is linked directly to foreign investment. If planned projects proceed, price decline is almost inevitable.

But state government moves in Victoria and New South Wales to lift sharply increase taxes on foreign buyers of Australia real estate are likely to prevent or limit that increase in supply.

Coupled with moves by the banks to curtail lending to foreign buyers and ATO measures affecting sales above $2 million, Australia has quickly cobbled together a series of major disincentives to foreign investment. There are reports of Asian investors switching their focus away from Australia to other, more welcoming nations.

If foreign investors stop buying (they won’t all be turned away, but many will, I suspect) many of the proposed apartment projects simply will not be built. 

The big increase in new dwelling supply will be lost, as will many construction jobs. 

In reality, I suspect the state measures have little to do with a desire to improve affordability. It’s essentially a cash grab, disguised as a measure to help young Australians achieve home ownership.

Like everything else coming out of the befuddled brains of politicians, the moves will make the problems in real estate worse.

Terry Ryder is the founder of hotspotting.com.au. You can email him or follow him on Twitter.