Tim Colbatch on the Housing Crisis

Tim Colbatch, Economics editor at The Age, has been trying to keep the issue of affordable housing on the boil (see here and here for earlier pieces) - even if our politicians seem treat the issue like playing pass-the-parcel with a time bomb (sorry about the mix of metaphors). Not being an economist, I find it very difficult to understand what causes the decrease in housing affordability, especially (as Colbatch points out) when we are living in a time of economic prosperity. He asks the very question that Perry asked a week or so back in the combox: Why is it that "a million or so young and lower-income Australians who want to buy a home of their own are now unable to afford a home that suits them"?

His article this morning is prompted by a new paper for the Australian Housing and Urban Research Institute. While he acknowledges the paper's suggestion that the solution lies in "a range of targeted solutions", he also has this to say:

The weakness of their paper is that it looks for demographic reasons for the fall in home ownership, when it is clearly the result of competition from housing investors.

In the 1980s, 85 per cent of finance to buy existing homes went to owner-occupiers and 15 per cent to investors. In the '00s, investors' share averaged 41 per cent. In Victoria, in May and June 2010, investors buying existing homes got 51 per cent of bank finance, and owner-occupiers 49 per cent.

You cannot have investors increasing their share of the market without squeezing out the first home buyers. It's a zero-sum game, and politicians such as Wayne Swan who give $5 billion a year in tax breaks to investors are in effect blocking young and low-income buyers from owning a home.

Oh no, they say, you can't take away the negative gearing tax break without creating a shortage of rental housing. Yes, you can.

Aspiring first home buyers are mostly renters. When they buy a home, they cease to rent. There is one less home to rent, but one less household wanting rental housing. Supply falls by one, demand falls by one, and the net balance is unchanged. The market does not tighten. Rents do not rise. Families are not thrown out on the street.

This is an issue ripe for a reform government that is prepared to lose some skin to make Australia work better.

As Colbatch says in one of his earlier pieces on the subject: "Housing exists to provide shelter for families, not shelter from tax, and the law should be changed to reflect this." I generally agree with Colbatch - comparing the massive change in investment to first-homebuyer lending would indicate that this is where the problem lies (in the main, anyway). And I agree with his simple point that in the long run there would be no "rental shortage". Yet I am also aware that any changes to the current tax situation would need to be gradual rather than dramatic, because in the short term a removal of negative gearing and other tax breaks for rental investors would drive our rental prices up very rapidly. This would settle in time, but there would be a period of pain for both landlords and renters. Still, what must be done must be done. And yet one is all too aware that for any government to actually do this would require, in Sir Humphrey's words, "courage"...