Australia’s Housing Affordability Crisis of 2023
Australia’s housing affordability crisis of 2023 has eery similarities with the Greek Crises of late 2009. Instability following the global financial crisis was the trigger that spawned it. At its root were high levels of debt and at the branches were years of austerity.
It was a harsh and oppressive medicine which caused a lot of hardship and plunged Greece into its own version of a modern-day depression.
The debt excessive debt originated in the public sector. In Australia, it started in the private sector but has spread to the public sector with the economic assistance packages provided during the pandemic. It is being further supported by high levels of welfare, such as NDIS spending and state borrowing, to provide infrastructure.
The Greek crisis brought about an end to an elaborate system of large transfers from the EU to the private sector. This transfer of government largesse funded an unsupportable way of life for many Greeks. One of those was the provision of government pensions for people who were quite young and far from retirement.
After more than a decade of struggle and belt tightening imposed by the EU, Greece is back on a much sounder fiscal footing. During its decade of struggle, it endured the loss of a quarter of its GDP and unemployment rates over25%. It is now back to an unemployment rate of about 10%.
The largesse experienced in Australia mostly comes from the private sector rather than the public sector. It is far more limited to a particular sector of the economy. The housing sector.
It is a topic that is elevated in national conversation. It is the subject of an essay by Alan Kohler in the Quarterly Essay titled “The Great Divide – Australia’s Housing Mess and How To Fix It”.
His remedy for how to fix it is to get the price of houses back from 7 to 8 times average income to 3-4 times average income like it was at the turn of the century. In his interviews with various journalists, including with one at The Guardian, he does not sound very optimistic about the chances of this happening soon.
Lost Decades
He outlines a process that could take two decades whereby property does not rise further and allows the opportunity for incomes that have been rising at an average of 3-4% to catch up. Changes to negative gearing and capital gains tax rates could help this.
That sounds like the path to austerity that the Greeks had to undergo. I cannot imagine a government outlining policy measures whereby property prices are stagnant for two decades. To be fair to Alan Kohler, neither does he. He sounds like a man in despair in his interviews.
If something doesn’t happen soon, we will be drifting towards being a country we really shouldn’t want to become. One where the best thing you can do when starting out in life is to choose your parents wisely.
My view is that solutions to these problems, if they arise, usually happen more quickly. I can’t imagine generations of Australians simply giving up on a way of life that provides a lot of dignity and security that easily.
Here is what I think is a scenario before hordes of our disenfranchised youth march through streets, throwing bricks through windows, protesting at being forced to live itinerant lives in expensive rental accommodation.
It is a version of austerity, but one that does not mean depression levels of unemployment, and it is already unfolding.
It is becoming apparent that inflation is now a home-grown affair. The government keeps talking about international factors such as wars and supply side issues arising from the pandemic. On all objective grounds, that cover is growing thin.
The international factor that counts the most now is the level or Net Overseas Migration.
We have an intemperate level of government involvement in the economy that is crowding out private investment and increasing aggregate demand. This is from things such as expenditure on the NDIS and infrastructure spending by the states. We predicate it on structural deficit spending that is hidden by the strength of the boom in our commodities.
Policy or Targets
Another factor is the communist style targets that are replacing rational policy in the energy transition. The value of subsidies and number of regulations that have distorted the energy market to date will soon pale into insignificance as the government doubles down on its carbon reduction targets.
A low unemployment is exerting a powerful influence on wage negotiations. Aided by recent decisions to subsidise the wages of care workers and significant increases in minimum wages.
The pressure for this is unrelenting and will mean that the inflation rate will take far longer to get back to the acceptable range than earlier thought. It will even start rising again.
The Reserve Bank will target this entrenching of an unacceptably high inflation rate in a manner which it has warned us about and in the only way that is available to us that works. Interest rates will remain high and possibly go higher.
The time that it takes to get prices and incomes back in line will be shorter if incomes are rising at 6 to 7% rather than 3 to 4%. But with no additional productivity, it will mean that interest rates will be substantially higher for longer.
The Brutality
This brutal process has the potential to speed up returning house prices to normality regarding the measure highlighted earlier. House prices in terms of a multiple of average income.
The degree of brutality will depend on the degree of crowding out of private investment that the government undertakes and the level of Net Overseas Migration.
The only way to ease the brutality is not by cutting Net Overseas Migration, which is a policy lever that at least the government could use.
That is the only measure stopping us from slipping from a per capita recession to a full-blown one.
Increased productivity driven by economic reform is the only way to ease it. That is not even on the table for discussion.
Australia’s housing affordability crisis of 2023 looks set to last for a long while yet.
