Rental Crisis

Today's Perspective ABC Radio Natitional I hope I'm not the only one who sees the irony in Australia's economic crisis du jour-the chronic shortage of rental accommodation? A shortage of houses and apartments for rent? Hang on, didn't we just have Australia's biggest ever housing boom? Wasn't the boom driven by investors, rather than homebuyers? Weren't all those "Mum and Dad" investors building units for rental accommodation? If so, how come we've run out of rental housing, just two years after the boom ended in the Eastern States? And is the solution simply to drive rents up ten or twenty per cent, as seems to be happening? Or should we just abolish stamp duty to kick life back into the building industry and solve the problem with another round of speculative building, as the Property Council recommends? No way! What we should do instead is take stock of precisely why we've ended up in this completely senseless pickle. The root cause of the problem is that speculation, and not investment, has determined how many houses are built in Australia. So-called investors purchased apartments, not to rent them out, but to make a profit by selling them down the track for a higher price. In fact, they expect to lose on their rental income, because that earns a nice little tax break, from the combination of negative gearing and a 50% tax rate on capital gains. This scam worked a treat while housing prices went ever higher, and there was always another "investor" willing to grab the baton on this relay race into the stratosphere. But its days have come to an end. Prices have been driven so high that, not only can first home buyers no longer afford them, but even "investors" no longer believe that there will be other "investors" further down the track. As a result, the supply of new housing has dried up, and simultaneously we've realised that not all that much was being built anyway, relative to demand: why build a new place, when the negative gearing and capital gains tax trick work just as well on a second hand place? Let's face it: this was always a foolish way to run a property industry, and it was always going to come to grief. Many years ago, a certain prescient economist, writing of a similar period of economic madness, put it superbly: "Speculators", Keynes wrote, "may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." Ill-done indeed! And the legacy of our speculation-driven property market is not restricted to the unpalatable combination of unaffordable houses, excessive rents and inadequate accommodation. The truly insidious side of the housing casino is the debt it's led us to accumulate. The Reserve Bank noted this week that housing prices rose 175 per cent from the mid-1990s. But mortgage debt rose by almost 450 per cent over the same period! As a result, if prices fall, many "investors" will have debts that exceed the value of their investments. We are now in the invidious situation of having house prices that we can't afford, and yet we also can't afford to have them fall. The solution is certainly not to alter policies so that the bubble resumes, speculators once again start building apartments in order to sell them to other speculators, and as a by-product, renters can once again find apartments rented by landlords who are losing money on the deal. Instead we have to find a way to have a housing industry that builds on the basis of demand for accommodation-and not on the basis of tax-supported speculative gains. That policy isn't likely to be found by looking in the Anglophile countries, all of which seem afflicted by the casino approach to property. It's more likely to involve rental arrangements similar to those of Europe, where tenants have-or had-greater rights and longer-term tenancies. Working out the details of such a policy, and introducing it into Australia's home-ownership obsessed culture, won't be easy. But ultimately something like it has to be done. What would be easier now, and what would have been impossible at any previous time, would be to abolish negative gearing and the preferential tax treatment of capital gains on property. Negative gearing, and the concession on capital gains, only work when property prices are rising-and not only is that the last thing we need, at the moment it's also the last thing most Australians expect. Guests Steve Keen Associate Professor Economics and Finance University of Western Sydney