In an interview with Neil Mitchell’s 3AW on Friday, Prime Minister Abbott said “Don’t forget Neil that if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset.”
His comment prompted Neil Mitchell to respond prudently with, “But interest rates can’t stay at this level, people are going to get burnt!”
Abbott shunned any responsibility, lumping it on the central bank by saying, “I am sure the Reserve Bank is very conscious of the fact that there are a whole range of things that need to be managed here and I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.”
His ignorance is likely to have heads shaking at the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and even the International Monetary Fund (IMF) who have all been sounding alarm bells in recent weeks.
Australia’s housing bubble and associated household debt is acting as a leech, sucking blood out of the economy. In the low interest rate environment, The RBA is struggling to keep the housing market under control, while supporting the faltering broader economy and attempting to cool the strong Australian dollar.
One of the causes of euphoria in the housing market is a broken taxation system, severely distorting the economy and something clearly the responsibility of the Federal Government, not the Reserve Bank. Two Howard Era tax concessions instantly spring to mind.
The 50% capital gains discount introduced in 1999 – when coupled with negative gearing introduced decades earlier, accelerated the accumulated loses of residential property investor making the playground much more geared towards speculative capital gains and not rental yield.
And the hot topic in the recent months – Allowing Self Managed Super Funds (SMSFs) the ability to borrow and leverage up into the property bubble, introduced by Liberal’s in September 2007. This not only creates a risk for the residential property market, but has severe implications for our superannuation system as well.
Abbott is hoping renewed confidence in the housing market will result in more homes being built – alleviating some of the supply side constraints. However, this could be flawed thinking as there is little evidence to date to suggest this will happen as most speculators play in the established residential housing market. If Abbott wanted to show some leadership and create a tangible outcome, he could quarantine negative gearing and make it only available for new dwellings.
Australia’s housing bubble is a significant issue that needs the concerted effort of the Federal Government, the RBA and APRA. Setting the Reserve Bank up to fail shows both poor leadership and poor form.
» Interview with Neil Mitchell, Radio 3AW, Melbourne – The Prime Minister of Australia, 27th September 2013.