Just as energy morphed from a political issue into a genuine policy crisis for the government, housing prices are now emerging as another challenge that not merely threaten to deal the Turnbull government a political mugging but risk the real economy.
The paths of both issues are eerily the same. The government has engaged in self-delusion on energy for years, unwilling to see that its climate denialism was creating an investment environment so uncertain to investors that they abandoned not merely investment in coal-fired power but also in renewables. As the consequences began to make themselves felt, the government’s first instinct was to use it as the basis of a scare campaign against Labor, until the spreading impact of gas exports began threatening manufacturing jobs up and down the east coast. Cue summits and policy on the fly as the government moved heaven and earth to create the impression it was Doing Something — culminating in Malcolm Turnbull’s silly, poll-motivated Snowy Hydro 2 media release.
Along the way, policy ideas from Labor that last year looked politically risky and left-field are suddenly centrist examples of common sense.
On housing affordability, the government’s scare campaign instincts kicked in immediately when Labor proposed negative gearing and capital gains reforms. Then it decided that it needed to be seen to Do Something on housing affordability as well, so the forthcoming budget was going to be focused on that. But the issue is rapidly becoming a policy challenge serious enough that waiting for the budget and its measures — which would take months or, more likely, years to take effect — was no longer an option.
It’s thus been left to regulators to take action. As they did in December 2014, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission have struck a one-two blow against housing investment lending — with the support of Treasurer Scott Morrison — amid real concerns that borrowers are over-extending themselves, banks are lending too freely and that an apartment market correction could see developers wiped out, householders defaulting on mortgages and banks looking at major write-downs, with dramatic consequences for the broader economy.
But as with energy, the Coalition hasn’t merely done nothing to address the core problems, it has exacerbated them. The soaring home prices in Sydney and Melbourne and the double-digit growth rates in other cities don’t just reflect local factors but the massive subsidies the Commonwealth is handing to housing investors via the tax system to help them outbid owner-occupiers. It’s taxpayer money helping to drive prices to the highest rate of growth for 15 years in some markets. During the election campaign, Turnbull and Morrison sought to make heroes of housing investors exploiting negative gearing.
And as with energy, what was initially a risky and much-attacked policy from Labor on negative gearing and capital gains tax is suddenly mainstream thinking. Mark Steinert of Stockland broke ranks with the property industry in March to back negative gearing changes, David Murray has called for negative gearing to be wound back to address the property market and the Australian Institute of Company Directors wants negative gearing and capital gains tax reforms.
Capital gains tax changes have an on-again-off-again quality as the government tries to resolve internal divisions about reforms Treasury has evidently worked up in great detail for the budget. But such is the ridiculously high level of house price growth in Sydney, in particular, that fiddling at the margins on issues such as financing rules for low-income housing, and relying on the regulators to hose down the banks’ lending departments, isn’t going to cut it; a budget without some attempt to reduce the profound distortions inflicted by the tax system on housing investment will be seen as a failure.
Noting that Labor was ahead of the game on both issues isn’t to suggest shadow Treasurer Chris Bowen et al possess some sort of economic telepathy, it’s to point out that if an opposition can anticipate, and develop responses to, major economic challenges, then surely it isn’t beyond the wit of a government — even one as bitterly divided as this one — to do the same, and do it better than an opposition can. The budget will show us whether that’s true for the Turnbull government.