What should we advise the Australian Labour Party to do?

If only we’d seen it as a property bubble. If only we’d realised price rises can’t go on for ever. If only we’d have woken up to the fact that house prices seven times the average income was a crash waiting to happen.

Hindsight is a valuable thing. We didn’t take seriously any of these possibilities during the boom. Not Whitehall, industry, government or opposition. There were some sane and far-sighted voices in the wilderness, such as Shelter’s new Head of Policy, but they were certainly the exception.

With this new wisdom even a Tory government is saying government should have intervened in the housing market and would use in the future ‘levers’ to ensure a bubble did not inflate again.

It seems highly likely to me that rapid house price rises will resume again as soon as lended loosens up (which could take a while admittedly). But we don’t have to wait until then to try out our new wisdom.

A colleague recently drew my attention to house prices in Australia, a country considered to have managed its economy well and escaped the worst ravages of the global recession. However, if you look at their house prices, it looks like they have simply delayed their crash:

Australian house prices are booming and escalating higher still with broadly the same factors that drove the unsustainable increase in Britain and with households taking on similarly huge amounts of debt.

So with new-found wisdom and confidence that we can deflate any future bubbles, what should we advise the Australian Labour government to do, that would a) work, b) not cause the bubble to burst quickly  and c) carry enough popular support so that it can be done by a government with a majority of one.

We’ve got a real life exam question here; I’m still not sure we have a credible answer for Australia now or Britain again in the future.

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6 Responses to What should we advise the Australian Labour Party to do?

  1. Tim says:

    I’m the ‘colleague’ Tony referred to who wrote about housing in Sydney on my blog (see Tim Williams on WordPress,under a Regeneration and Renewal umbrella).I was a special advisor to David Miliband on housing ,regen and local government and advised all subsequent housing ministers on some aspect of housing or other.So my fingers are all over this. Essentially,the housing department had no control over Treasury and we confused housing need (real enough but not scientifically quantified) with housing demand(which was being stoked up by over lax policies by Treasury and under-regulation by its agencies such as the FSA). So housing need was growing because housing demand was being whipped on by too low interest rates ,raising house prices preventing lower income and younger folk from accessing homes no longer affordable! Then the house-builders’ business model kicked in as they effectively constrained supply in order to keep their ,margins up. Oh and then planning and environmental policies then inhibited the supply of land to said builders which further limited housing numbers and raised prices.

    Not all of this applies in Australia. The demography is real enough with population growing. I think management of the financial instututions has been better in Oz though I suspect the federal treasurer is about to raise interest rates (already 4 points ahead of the UK’s flatlining level) to choke off demand .House prices are already stabilising it seems to me. Despite the scary graphs I think they might just have enough policy and brain to fend off a drop of about 15% which the Uk kas seen in prices.Maybe we are about to see that most mystical of beasts in housing :the soft landing.

    Having said that ,what goes up must come down and soft landings rarely happen. The deeper point is of course what did governments think they were doing by enabling the market to flood society with such cheap money. Centre left governments thought they were helping poor people access equity – as well as wanting to be soon as pro the aspirational or as they say in Australia, the ‘battlers’.There was a politics to home- ownership on the centre left as well as the right ,in the Uk ,the US and Australia.

    A space should have opened up after the Global Financial Crisis to provide alternative tenures and justify them politically. Tony and Toby(now of Shelter) will know I pushed this as an advisor as did Tony. More tangibly I don’t think the silly,easy money of the noughties is ever coming back to housing finance. That is the view of many in the game and look at the moribund state of the house-builders three and a half years on from the start of the crisis .Zombies.

    So new models(rented, shared ownership,cooperatives) have to be found anyway to deliver supply. So where’s the Labor/Labour Party with a narrative about this?

    In Australia the Labor government gave a huge stimulus to the social housing and private rented market by their economic package to fend off recession. That worked economically amazingly well though they get no political credit because dumped the prime minister who did that(without explaining very well why).It has had the perverse(?) incentive of persuading mums and dads to get further into property speculation (via owning a few private rented units)though it has not created the conditions for a high quality ,big,private rented sector attracting institutional money of the kind we need,i think.It has however transformed community housing providers and some of them are on their way to being big UK style RSLs.

    Advice? Raise interest rates sooner rather than later.Incentivise private rented.Syphon off economic demand from the capital cities .Lower entry level costs for housebuilders so that small guys can get in to shake up the market. Think through the brown-field-greenfield issue and be more flexible about building on the latter. Develop a narrative about the benefits of alternatives to ownership,helped by the fact easy money is not coming back .Read my blog!

  2. Dan Filson says:

    I think that actually a vast number of people thought and also said that price rises couldn’t go on for ever and that house prices seven times the average income were a crash waiting to happen. What we were powerless to do was control events. And even those who though the property market was wholly unsustainable had no idea that city idiots were bundling dodgy mortgages together, getting them AAA ratings and borrowing still further on such ropey security. We know where that led.

    I think you are right to smell a crash in the wind (excuse the mixed metaphor). The sensible way of preventing a painful property crash is to precipitate a modest one earlier – increase deposit requirements, require better evidence of income, require ceilings to multiples of earnings, and so on. But in the longer run, there is a need to end the belief that – over a much longer term – property prices will always outstrip general inflation, from which stems the belief that property is always worth investing in. Arguably the obsession with owner-occupation has stripped stock markets of the prudent private investor whose capital is currently first put into housing. The best remedy is to put residential housing on a fiscally level playing field with other assets – end the CGT exemption as soon as possible. I don’t know how this can be done without creating a messy tax structure, but it has to be done – but no politician nor any political party is brave enough to bite this bullet.

    • Tony Clements says:

      Apologies Dan, if I did down you or any of your colleagues – though it wasn’t a debate that ever managed to get any traction until the worst hit.

      Do you think a government with a majority of one can get away with the measures you describe?

  3. Tom says:

    Are there any examples of land value taxes that were slight enough to dampen demand? This report may hold some ideas (http://www.andywightman.com/docs/LVTREPORT.pdf) though it probably fails your “pass with a majority of one” test.

    If the Australian market is also suffering from a lack of low cost housing, something that could raise revenue to invest in publicly owned low rent housing could help both ends and win a bit more public support if you start tightening lending rules.

    • Dan Filson says:

      The trouble is that going all the way back to Selwyn Lloyd as Chancellor, if not earlier, the belief that a ‘touch on the tiller’ can manage the economy – or aspects of it – has been shown increasingly to be fairly fallacious. So whilst, in theory, land value taxes might reign in speculation on land, those land value taxes would have to be varied around the country, according to where the hot spots were; and no changes in land value taxes that are slight enough to dampen demand are ever likely to be imposed by politicians looking over their shoulder at public reaction – it would not be worth the rumpus. Demand in a property boom is a juggernaut fuelled not by logic but a greater force – greed – and the kind of tax changes that would halt that would need to be abrupt and shocking, not tentative and moderate.

      Politics does not admit the bold, only the feint-hearted; thank God, given the damage the bold can do (remember the 1980s).

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