The AFR's economics editor, Alan Mitchell, also touches on this issue when discussing the asset price targeting debate, which I have also covered at length in the past. While Mitchell's article is an improvement on some of his previous efforts where he argued that the RBA should target asset prices only to see these simplistic claims rejected by the likes of David Gruen at Treasury and Guy Debelle at the RBA (see here and here), he also misses the point when it comes to responding to house price inflation.
As I documented some months ago (refer to end of article), Australia does not possess an anomalous tax regime with respect to our housing market. The vast majority of our peer economies have full CGT exemptions for owner-occupied housing, non-deductible owner-occupied mortgage debt, allow negative gearing on investment properties, and furnish partial CGT relief in the rental market.
Changing the tax treatment of housing is not going to do anything to address the current economic dysfunctions. The key problem here, as Mitchell acknowledges, is not unusually high credit growth, which is currently running at nearly half the historical rate. It is, as I have had to relentlessly repeat since 2003 to an initially deaf regulatory audience, the supply-side, stupid.
In 2004 the RBA and, to a lesser extent, the Productivity Commission Inquiry that was established in response to my 2003 report, tried to posit that the supply-side was not a serious concern. To quote the RBA:
At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing.The RBA now argues that there was no evidence of a housing shortage at the time: however, this was never the issue. It is the supply-side rigidities/inelasticities that have been building up for decades and which have since 2000-01 started to manifest more explicitly in the form of a dwelling stock deficiency (based on ANZ and Westpac's underlying demand-supply analysis) that is the problem. These inelasticities have not suddenly appeared in the last 5 years, as some might have us believe. Indeed, they were just as important in 2003 as they are today.
Increasing the tax burden on housing, as Alan Mitchell advocates, is a silly suggestion and only going to exacerbate supply-side constraints by significantly reducing the incentives private builders and developers presently have to manufacture new housing (ie, given the decline in expected returns and considerable uncertainty created by any such changes).
In a future column I will show that arguably the biggest impediment to new housing investment is precisely the supply-side tax burden that builders and developers are having to now wear, which is driving up marginal dwelling prices beyond the market-clearing value that new buyers will accept. It is easy to demonstrate that around 30% of the price of a new home in NSW is accounted for by government taxes and charges (now this is what Kevin Rudd, Wayne Swan, Lindsay Tanner and Tanya Plibersek should be focussing on). In brief, it is becoming non-economic for the private sector to commit scarce economic capital to this space. The best way to reduce marginal dwelling prices is to cut the tax burden not increase it.
I will also show that contrary to Alan Mitchell's rehetoric, established housing in Australia is actually not that expensive by international standards. This is entirely consistent with the extensive time-series IMF data that I presented to the Melbourne Institute conference (the session in question was chaired by Michael Stutchbury), which illustrated that real house price rises in Australia over the last 10, 20 and 30 years were demonstrably "middle of the road" vis-a-vis peer economies (you can download the presentation here). This is also true of the growth in our house price to income ratio since 1997, which, according to the IMF data, has been less than the rate of increase seen in the UK, France, Sweden, Spain, the Netherlands, and Ireland.
While on this subject, Stephen Kirchner correctly argues in The Australian today that one of the reasons why Steve Keen lost his bet to Rory Robertson on house prices was his neglect of the supply-side. I made the same point in an op-ed in The Australian in December last year. Stephen also notes that this has cost Keen some serious cash.
More anon.
