Home > Economic policy > Quick take on fiscal stimulus package

Quick take on fiscal stimulus package

October 15th, 2008

I’ve been responding to quite a few media questions about the government’s fiscal stimulus package and I haven’t had time to formulate more than a dot-point response. So here goes
* The size of the package is about right and it makes sense to announce it now
* The help for pensioners and low-income households is well-targeted to meet both policy objectives and the need to bolster demand
* I’m less impressed by the increase in the First Homeowners grant. In the long run, this scheme has been part of the problem of high housing costs, not part of the solution. Maybe the government has information suggesting the possibility of a rapid collapse in the housing sector, in which case some sort of emergency stimulus might be necessary. But the medium term direction of house prices has to be down

I don’t think that differs much from the par response from economists, but I’d be interested in readers’ thoughts

Update 19/10More on this from Tristan Ewins

Categories: Economic policy Tags:
  1. Roger
    October 15th, 2008 at 16:02 | #1

    Spot on John – as most of the rest of us are saying -http://roger-wegener.blogspot.com/2008/10/poor-policy-dressed-up-as-good-idea.html

  2. Michael of Summer Hill
    October 15th, 2008 at 16:29 | #2

    John, whilst I agree with the general underlying principle of the government’s fiscal stimulus package I find the formula to be inequitable, unfair and unjust as many Health Care Card holders living below the poverty line are left out in the cold. Furthermore, if politicians from all persuasions are worth his or her salt they will reject the government’s stimulus package until all Health Care Card recipients are included as eligible for the lump-sum payment of $1,400.

  3. Father Mercy
    October 15th, 2008 at 16:37 | #3

    What about the spectacle of an ALP Prime Minister praising banks? Have we reached a time when the lion shall lie down with the lamb? Will room be found in the ALPs’ pantheon? Will Gough, the silver budgie, and, Saint Paul be happy to have Kev747 admitted? And what ever happened to that most hated evil demon known as inflation? About three months ago we were told a cashed up and profligate great unwashed would push inflation up to an unacceptable level. Now I expect Kevin to man the door at DJs asking shoppers to spend up big to help the nation. Is anyone in control?

  4. CuH
    October 15th, 2008 at 17:03 | #4

    John, do we need government spending on public works/infrastructure/greentech?

    Seems that spending on building eg public transport, windmills etc would be a better way to funnel money to builders and suplliers than spending on propping up house prices?

    How should this kind of public spending fit into an Aussie stimulus plan?

  5. Nick K
    October 15th, 2008 at 17:21 | #5

    Regarding the increase in the first home-buyer’s grant, I suspect that John’s assessment is correct. The government may have information the property market is going to collapse, so they are trying to prop it up. Given that Australia has the most overvalued housing market (prices to average incomes) of any developed nation, this could be very much on the cards.

    But if this is so, I think the measure will actually do more harm in the long-term. If more people are convinced to enter the property market and borrow large amounts, it will ultimately mean even higher levels of debt being secured with inflated property values.

    If you have even more debt and taxpayer subsidies propping up inflated house values, it will mean an even worse fallout when prices eventually fall sharply.

  6. Ernestine Gross
    October 15th, 2008 at 17:30 | #6

    On the first home buyers’ grants – for what its worth:

    IMHO, the grant is a very soft income redistribution measure which aims to put a support under the housing construction industry. In some cases it assists environmental and social objectives. The only way I can imagine to refine it is to means test it. Is the bureaucracy worth it? Or would a reasonably small increase in the top marginal tax rate be a fairer way?

    A $21,000 first home builder grant barely covers the costs of the compulsory water recycling system in a new residential area in North-West Sydney and in Ku-ring-gai. On equity grounds I would consider it fair that people who save water for other parts of Sydney shouldn’t have to bear all the costs.

    A 21,000 first home builder grant constitutes up to 1/3 of the building costs in some rural areas in Australia. Any objection to getting a bit of money and work into the bush?

    A $14,000 first home buyer grant provides a little bit of support for the already depressed (non-negligible price declines) housing market in the South-West of Sydney. Surely, helping to create a market to allow people who over-extended their borrowings to sell their houses without losing their shirt is not a bad idea.

    Thinking through the consequences for various sub-housing markets on my radar screen and using publicly available information, I’ve come to the conclusion that there may be a few people whose decision to build a house is not affected by the grants and whose personal wealth and income does not require a subsidy. Hence the temporary idea of means testing.

    IMHO, we don’t have a housing bubble. The situation is not comparable to that in the USA.

    We have a serious divergence in the growth rates (plural) of real estate prices and incomes (plural). There are signs of a weakening housing construction sector (potential unemployment). There is a private sector debt overhang, more so in some segments of society than in others. Some segments of society are more affected than others by the bursting of the financial asset bubble, and there are a host of physical environmental problems. So, all prices are ‘disequilibrium prices’ at present. The last thing we now need is another discontinuity in one sub-market. Let the relative prices and personal plans and price expectations adjust gradually (toward something less obviously out of kilter) and let the government help a little bit in this process.

  7. Ernestine Gross
    October 15th, 2008 at 17:34 | #7

    Just as well I am used to being the ‘odd woman out’.

  8. October 15th, 2008 at 17:36 | #8

    The stimulus package was a perfect opportunity for wide-ranging tax reform gone begging.

  9. Joseph Clark
    October 15th, 2008 at 17:44 | #9

    EH,
    Adjustments to the first home buyers grant are pretty much immediately capitalised into the price of land. There is no reason to suspect that they have any long-term impact on affordability. I can’t imagine how it serves any environmental or social objectives.

  10. October 15th, 2008 at 17:48 | #10

    I’m not sure the FHOG increase for new homes is so bad – though it’s a damn lot. It could pull forward a lot of building. The policy for existing homes seems silly and I liked Saul Eslake’s proposal to spend it on building low rental housing.

    I also think that there remains a hole in the total monetary and fiscal package which is that banks are finding it too easy to displace securitisers in the home loan market and the Govt should have offered guarantees to kick start the securitisation market. They’re putting some of their own investment funds into residential mortgage backed securities, but not enough. And doing it with a guarantee will increase their expected returns whereas what they’re doing looks like diminishing them.

  11. Ian Gould
    October 15th, 2008 at 17:54 | #11

    CuH@4 – Infrastructure is already scheduled to get $40 billion boost over the next few years.

    One of the smaller components of the current package is several hundred million dollars (IIRC) to accelerate that spending.

  12. Hermit
    October 15th, 2008 at 17:56 | #12

    It’s hard to get a take on ‘greenshifting’. While it has been advocated in the US as a kind of new Marshall Plan, it has just failed to get the main Canadian opposition party elected. On the other hand even Barnaby Joyce is hinting along these lines. At the very least new infrastructure programs should be sustainability oriented. Thus six lane highways and coal loaders should be shelved in favour of rail or upgrading the electrical grid. I think Rudd will regret his haste on Christmas presents.

  13. Bingo Bango Boingo
    October 15th, 2008 at 18:14 | #13

    Nick K, do you have a link for your assertion that Australia has the ‘worst’ prices-to-average-incomes ratio? I would have thought that places like France, Denmark, Ireland, Sweden etc. are worse. But then I haven’t followed these things recently and I’m happy to be proved wrong.

    Cheers
    BBB

  14. Spiros
    October 15th, 2008 at 18:19 | #14

    “The stimulus package was a perfect opportunity for wide-ranging tax reform gone begging.”

    This being tax cuts, presumably.
    Which would have been useless because people would have saved them. The money would have piled up in bank accounts and stayed there because banks are not lending to anybody.

    Whereas if you give money to pensioners they spend it on dog food etc.

  15. October 15th, 2008 at 18:31 | #15

    The first home buyer’s grant just serves to artificially prop up already inflated house prices, Australia still has plenty of room to move with interest rates, a luxury the US didn’t have.

  16. Nick K
    October 15th, 2008 at 18:37 | #16

    BBB, Sorry I don’t have a link for the claim that Australia has the worst prices-to-average-income ratio. Will try to find one.

    However, I believe the ratio in Australia is 7:1. A ratio of 3:1 is considered desirable for affordable housing.

    As for housing affordability in European countries, it may well be that the average ratio is not quite as high as Australia. However, in those countries an ‘average’ home is much smaller than in Australia.

    So you are right in that sense, in that if you tried to buy an equivalent home in Europe, it would cost more.

    However, I believe that the average price to income ratio is the telling statistic, in that it measures whether existing property values can be sustained by people’s incomes and therefore ability to pay.

    Admittedly, if there is a shortage of housing then a high ratio can be sustained for longer. Yet what this ignores is that there is a certain amount of elasticity of demand in the housing market. If the economy experiences a downturn, many people might move to a smaller home or move in with family etc. Then voila, no housing shortage.

  17. Gerry
    October 15th, 2008 at 19:12 | #17

    I liked the ACT government’s homebuyer’s concessional arrangements – the cheaper the dwelling the greater the concession, tailing out to a zero concession for higher end properties. they should have applied a similar principle federally, directing the subsidy to the lower half of the market, not simply inflating prices in the top half of the market with a bidding frenzy.

  18. Ernestine Gross
    October 15th, 2008 at 19:25 | #18

    Re #9. Assuming EH is meant to read EG, my reply is:
    The time between now and the ‘long term’ is going to be marked by a series of new events which are not perfectly predictable ‘now’, but which will require new policy responses.

    May I point out that the grants have a limited time frame. Any resulting errors of the plan can be ‘mopped up’ via a suitably higher marginal tax rate in the upper income bracket(s?). This also applies to land owners who want to ‘capitalise’ (ie expropriate) the grants.

    The conceputal framework I am using is a ‘long term’ G.E. model with a finite sequence of markets for commodities and securities. Scientists tell us that the world has a finite life. Thus, the model is as long-term as can be. I am comparing assumed conditions with actual local conditions to form an opinion on relative prices.

  19. Ernestine Gross
    October 15th, 2008 at 19:32 | #19

    I don’t believe the home ownership grants are going to inflate the prices in the high end of the market in a meaningful sense. Does it matter whether someone pays $20,014,000 or $20,000,000? $14,000 is but a random error term in this price bracket, possibly due to who happens to be interested in the property at the time. The price differences between similar properties in the $1m to $2m bracket in Sydney also swamps the $14,000 grant.

    A higher top marginal tax rate seems to me to be more appropriate to reduce the extent of the divergence in the income distribution which is, IMO, part of the problem.

    Be that as it may, I am basically arguing that any policy measure should be viewed in the context of all other policy measures rather than as a ‘stand alone project’.

  20. JB
    October 15th, 2008 at 19:40 | #20

    The package announced isn’t perfect, but I feel it will offer a welcome kick along to the economy at a pretty crucial time. Like everyone out there, we checked out the package to see “what’s in it for me???”

    Well, the answer is I get nothing from it, but I’m comfortable about that. I’m doing OK -I have a good job that pays OK, and I’m saving to buy a place, but don’t qualify for the First Home Owners incentives, but I can live with that. I’m going to have to borrow an unheard multiple of my income for my new place that would shock my parents, but that’s what i have to do to find something I want. luckily for me interest rates are dropping…

    I try to look around and see who could really benefit from the package in such uncertain times. My elderly parents get a hand up, and my youngest sister that is on a disability pension, will get a help-up at a difficult time. A close friend who is a single mother with 4 children will get some real assistance – I marvel how she manages to look after the kids so well.

    I think people should remember that the firestorm on the financial markets is stressing the person in the street, what we call the “Daily Telegraph” reader. The package isn’t perfect, but come December, there will be some happy people when they check their bank balances..

  21. Rickwood
    October 15th, 2008 at 19:57 | #21

    I’m with you John. The handouts are OK, and reasonably targeted (though those without kids lose out, dont they….). The FHOG, on the other hand, is a terrible idea — I poor way to buy stimulus, and pretty regressive to boot.

    Even if the government does have research indicating a big slowdown in the housing market, the money could be better spent.

  22. Donald Oats
    October 15th, 2008 at 20:06 | #22

    Median house price in Murray Bridge is around say $210k. FHOG for existing home is $14k, State Gov has its own grant as well – I think it is $6-8k. So call it $20k in round numbers, which is close enough to 10% of the cost of the median home.

    Next, 100 basis points cut this month, possibly the same again in the near future.

    What is the median price for an existing home now? More than $210k + $20k, that is for sure. A larger loan can be accommodated since interest rates are dropping, *and* the borrower has approx 10% deposit without lifting a finger. Demand changes will also add to the upward price pressure.

    There are several ways that this might avoid causing a spike in house prices: for example if people are too fearful of looming unemployment to be willing to buy a home, preferring to wait out the crisis, or if a flood of existing homes hit the market (pent up supply, or forced sales due to job loss, etc). Perhaps the time limit on the grants will cause a damping effect on price increases – who knows? It will come down to the time scales of the different forces, I suppose.

  23. October 15th, 2008 at 20:23 | #23

    I agree with your three points John.

    It is good to see that there is help for pensioners, but as far as I can tell there nothing for Newstart recipients. Unfortunately it seems that the government has decided that there are no votes in increasing unemployment benefits because of the popular perception that recipients are “dole bludgers”. Little consideration has been made of the fact that the dole is not enough for people to live on and this provides barriers that make it more difficult for people to obtain employment.

  24. gthorpe
    October 15th, 2008 at 20:36 | #24

    With grant – buy a cheap house, get the grant, watch the price tumble by 20% 6 months later than if there was no grant, have negative equity!?
    With no grant – wait 6 – 12 months buy house cheaper than if there was a grant anyway, no negative equity!
    It is a bubble – the sooner and sharper it pops the better!

  25. October 15th, 2008 at 20:43 | #25

    Australian house prices relative to incomes: I happen to have some data to hand. Based on a quick calculation, the ratio of mean housing wealth of home owners to GDP/capita is

    Australia 2003-04: 8.5
    Australia 1998-99: 6.0
    Canada 1999 : 4.6
    UK 2000 : 6.9
    USA 2001 : 4.9
    Germany 2002 : 8.4
    Italy 2002 : 6.9
    Finland 1998 : 3.5
    Sweden 2002 : 3.6

    So Australia in 2003-04 (about the top of the house price boom) was very high – and probably still is. However Australian house prices were also quite high in 1998-99, where they were not that far from the long-term average. High rates of migration and a lack of small cities have been advanced as explanations for the historically high housing prices in Australia.

    Re the other countries: Germany is also high, but the rate of home ownership is very low – so these homeowners are probably at the top of the income distribution. The USA figure is prior to the latest housing boom.

    These data come from the housing wealth paper available on my website (though you have to back it out from Table 2 and Figure 2). I haven’t checked them very carefully, and the data will be revised slightly in the next version.

    Probably a better indicator of where houseprices will go next is the house price to rent index. The OECD estimated that in 2003-04 this was about 70% above the long-term average in Australia (reference in my paper). Since then, rents have risen quite a bit, but I think that means house prices still have a way to go down.

  26. stockingrate
    October 15th, 2008 at 20:46 | #26

    I’m opposed to the stimulus as I expect the recession will be deep and long, so it won’t be averted by the spend, and welfare needs will be greater in a few years.

  27. derrida derider
    October 15th, 2008 at 21:07 | #27

    I can’t agree with the bit about the payments being “reasonably targeted”.

    Studies of poverty and hardship in Oz consistently show that most age pensioners aren’t poor and most of the poor aren’t age pensioners. Since last year the “unemployed” have included single mums with school age kids and disabled people considered well enough to work part-time but not full-time. These groups have to live on a payment 20% lower than the age pension and won’t get the bonus.

    Plus a flat rate bonus means the full bonus goes to all those who’ve arranged their assets to retain a small age pension for the Pensioner Concession Card (most people don’t realise that you can literally be a millionaire and still do this). Its not well targeted at all.

  28. Joseph Clark
    October 15th, 2008 at 21:15 | #28

    EG@18,
    That all sounds very fancy but it doesn’t change the fact that first homeowner grants will be incorporated into the price of land that first homeowners buy. There is every reason for this to happen quickly and it does. It’s a transfer to homeowners at the expense of taxpayers with no real effect on housing afforability for first home buyers.

    It’s very clever politics. Homeowners know they get the price bump, home buyers think they’re getting money for nothing even though they’re not really getting anything, and taxpayers aren’t paying attention. Economists of all stripes should treat this nonsense with the contempt it deserves.

  29. Thinking in old ways
    October 15th, 2008 at 21:50 | #29

    I always thought of dropping money out of a helicopter as being the solution to deflation.

    Which raises a couple of issues all tied up with the other side of prices – inflation.

    Just how hard a fall do they think we are in for given that they seem to be so relaxed about inflation. (When I look at non-tradable inflation of 5.6% year on year and tradable at 2.9% (and having been lower than this for much of the past few years, thanks in part to the once rising Australia dollar) one must be expecting a fairly large contraction in demand from the rest of the economy.)

    Will the RBA still move to another cut – or will this now be deferred for the reasons above?

    Or maybe high inflation will be useful to mask the fall in real housing values – at least it will provide some cover for all the new first home buyers so they don’t move too quickly into having negative equity.

  30. Jill Rush
    October 15th, 2008 at 22:06 | #30

    The bailout doesn’t seem to be well considerred. The building industry could have been assisted, and renters too, by an injection into public housing rather than transferring money to developers who have been donating generously to Labor in recent years. It looks like their aid will be repaid very well

    As for the hand outs, smaller payments over a longer period or to include those transferred from Disability and Sole Parent Pensions onto Newstart would have been as easy to implement and would have been less likely to end up on plasma TVs, which will only increase carbon emissions and electricity bills.

    It is a lot of money to spend without even a glance at the Carbon emissions or the ways that the money could be spent in a binge.

    No wonder Malcolm Turnbull is asking for the background to the decision as it looks shaky even if delivered with gravitas by the PM.

  31. October 15th, 2008 at 22:08 | #31

    JC@28,
    I agree that most of the FHOG will go straight into the price of land. But I think that is the (unstated) point. A steep decline in house prices right now could cause major anxiety. The FHOG grant might just delay this enough to get us past the crisis period.

  32. Ernestine Gross
    October 15th, 2008 at 22:44 | #32

    Re 28. I suggest we’ll have to wait to see what the facts turn out to be, including on taxation.

    Incidentally, my fancy posts in earlier threats on the inadequacy of the balance sheet approach as a record keeping system in a monetary economy is now apparently a fact. The Opposition Treasury Spokeswoman said tonight on TV that there is no adequate data on interbank credit swaps involving Australian banks and therefore the amount of taxpayer’s money at risk from counterparty default is an unknown quantity. But, I do not wish to add to anxiety created by doomsday sayers. IMHO, much of the doomsday stuff is due to people having a fixed idea how ‘the economy’ should work. The bright spot in all this is that even the current US government is now aware that a model of how the economy should work is not a model but an ideology.

  33. Ernestine Gross
    October 15th, 2008 at 22:52 | #33

    Re 30. Jill, the government has already committed funds to public housing to be spent over 4 years.

    Re 31: Nevermind the anxiety. A steep decline in house prices (discontinuity) could set off serious disturbances in other markets.

  34. Joseph Clark
    October 15th, 2008 at 23:20 | #34

    BB@31,
    I agree with Quiggin here. Sometimes prices just need to adjust and the longer you keep them at artificial levels the worse things will be in the long run.

  35. frankis
    October 16th, 2008 at 06:08 | #35

    If adding yet more to an already ill-conceived First HomeOwners Grant is the answer then I’m sure I didn’t like the question. In other words “not even wrong”, and depressing.

  36. BilB
    October 16th, 2008 at 06:54 | #36

    I am going to agree with whoever above suggested public housing. This always founders on the issue of appropriateness (size, location, suitability for tennant type, etc). The solution is to cater for the knowns where the knowns compete in the general rental market. So I am going to suggest that a portion of the stimulus would be well spent on well thought out student accommodation. This would free up general housing for ownership and family renters in population pressure areas without running the risk of interferring with building market pricing in the way that a direct grant to home buyers will. And for a further perspective on the variables at play here there is an interesting article on the oil drum at present which talks about the progressive increase in dwelling sizes.

    The other thing that I would like to be seeing in this environment is more bipartisan participation, perhaps in the form of public debate and commitee discussion. This in order to test the strength of directions rather than the size of them. I find it annoying that smaller parties and oppositions are forced to hang around like a fifth leg (however well deserved this is in the Coalition’s case).

  37. Hermit
    October 16th, 2008 at 07:02 | #37

    When the aged pensioners spend their Christmas bonus on game boxes for their grandkids is that going to help them twenty years from now?

  38. gthorpe
    October 16th, 2008 at 09:43 | #38

    Hello John
    I was just looking for the privatization share price of the Commonwealth Bank when I came across your 2001 paper The ‘People’s Bank’: the privatisation of the Commonwealth Bank and the case for a new publicly-owned bank, available at http://www.uq.edu.au/economics/johnquiggin/JournalArticles01/CBAPrivatisation01.pdf
    In this paper you do indicate that the first tranche (1990) price of $5.40 was much too low, even that the third tranche (1996) price of $10.00 was 30% too low and that the proper price would have been around $13 per share.
    Given that the price is now $42 per share do you now believe the government should wait until the price drops to $13 before buying in, or that they should wait until they get a bargain and they buy it for the average they were paid ($8.00) or they should do a Kerry Packer and wait until it is $4.00 (The Australian public only comes along once in a lifetime).
    Or has your opinion changed so radically that you now believe that the government should just support “monopoly power” of private banks at their current super inflated prices?
    Just Curious!

  39. observa
    October 16th, 2008 at 10:15 | #39

    Deleted reprint of news article, as previously warned – please take a 48 hour break from commenting. To restate the rules for you
    1. No reposts of news articles
    2. No posts linking to news articles we really should read
    3. Nothing mentioning the SA government in any way, shape or form
    See you in a couple of days. JQ

  40. October 16th, 2008 at 10:23 | #40

    Ah, unreconstructed Keynesian economics. Where billions are blown on a “bailout” package (corporate welfare) AND we have a recession or depression anyway. Great stuff.

    The myth is that Hoover was a “do nothing” president whereas Roosevelt was the social democrats’ wet dream. A closer inspection reveals Roosevelt was merely continuing the policies of Hoover.

    Instead of a short, one year recession, it’s likely we are headed for something much worse – because governments keep intervening in prices and credit and causing confusion, as they are presently. There are no solid rules of capitalism anymore, as the Fed is arbitrarily intervening in financial markets (no point discussing the RBA, as they copy whatever the US does). The long-term effects are, of course, ignored.

    Read the Bailout Reader to understand how government created this mess, and how it will worsen this into a depression, just as it did during the 1930s.

  41. observa
    October 16th, 2008 at 10:25 | #41

    Never mind. If you listen quietly you can hear the spruikers in the background getting louder about the next big green asset bubble with carbon emissions and all its spinoff derivatives to throw at the good old reliable paradigm. Get in on the ground floor but be very wary when the cabbies start spruiking in earnest.

  42. Ernestine Gross
    October 16th, 2008 at 11:01 | #42

    Apologies for not providing the link to building approval data immediately.

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/MF/8731.0

    The publication lag (and the revisions) is a problem. I suppose that is why J.Q. asked whether the Government has further information – things could look even worse after September.

  43. October 16th, 2008 at 11:21 | #43

    To EG at comment 7: you’ve got nothing on Professor McCloskey in the “odd woman out” stakes.

  44. smiths
    October 16th, 2008 at 12:59 | #44

    off topic i know and i apologise, but

    this blog by UK tax expert richard murphy is essential reading for anyone who wants to understand how ‘the system’ really got into such a swampy mess

    http://www.taxresearch.org.uk/Blog/

  45. sdfc
    October 16th, 2008 at 14:29 | #45

    Ernestine

    Lack of supply will help keep a floor under house prices on an economy wide scale.

    Sukrit

    Maybe you can share some of Hoover’s policies with us.

  46. smiths
    October 16th, 2008 at 15:05 | #46

    Lack of supply will help keep a floor under house prices on an economy wide scale.

    there is not one shred of evidence to support this statement

    what a bank is prepared to lend defines house prices, and i think there will be at least a 40% house price correction

  47. Nick K
    October 16th, 2008 at 15:14 | #47

    dd at 27, Agree with some of what you say here. “Studies of poverty and hardship in Oz consistently show that most age pensioners aren’t poor and most of the poor aren’t age pensioners.”
    I believe most overseas research also shows that poverty rates among the elderly are actually lower than the overall population (particularly in the US).

    Although you wouldn’t know this judging by a lot of the propaganda and hand-wringing in the mainstream media, talkback radio etc.

    While no doubt some pensioners are doing it tough, I suspect they are actually in a minority. It’s a standard tactic for many advocacy groups to find a worst-case scenario, and then use it to justify increasing benefits to a whole lot of other people who are not in such a bad predicament.

    Given the aging population, it is completely unfair and unsustainable to have a dminishing ratio of working age people funding more benefits for a growing number of retirees. It would be nice if politicians had the courage to confront these things, instead of endlessly pandering.

  48. Nick K
    October 16th, 2008 at 15:32 | #48

    sdfc says “Lack of supply will help keep a floor under house prices on an economy wide scale.”

    I find the notion that there is a housing shortage amusing, when you consider many new houses today are larger than they were in the past and also have fewer people living in them.

    Right now, there may be an excess of demand over supply. But this is a short-term result of strong economic growth and demand. It wouldn’t take much of an economic downturn to change things.

    If the economy slows, eventually more people will no longer be able to pay their mortgages and will be forced to sell up and move to more modest accomodation. Pretty soon there would be an excess supply.

    There is no fixed supply and demand that will put a floor under house prices. There is actually a lot of flexibility on the demand side.

  49. Jill Rush
    October 16th, 2008 at 17:26 | #49

    #30 Thanks Ernestine. The govt has always put money into public housing through the CSTHA. Just not enough over a very long period and there are only houses for emergency reasons available. If the huge sums of money set aside to go into through young people’s pockets to developers and real estate agents were transferred into public housing it would create a better market for those currently locked out because they can never afford the cost of a new or old house in the long term.

  50. observa
    October 16th, 2008 at 18:09 | #50

    Sob,sob,it’s not fair! They told us we could make a killing your honour-
    http://www.news.com.au/adelaidenow/story/0,22606,24505572-2682,00.html?from=public_rss

  51. observa
    October 16th, 2008 at 18:21 | #51

    Given every buyer for these spec housing commission flats off the plan (the architects did sorta try to disguise them), and if they lose the sob story and have to settle, I wonder how long it will take some bright spark to offer a new plasma for select struggletowners, willing to sign some first home buyer paperwork. They’ve got $21000 to play with now, by all accounts.

  52. Ernestine Gross
    October 16th, 2008 at 18:34 | #52

    To PML at comment 43. Good one. You do seem to have a good sense of humour at the right time.

  53. Ernestine Gross
    October 16th, 2008 at 19:01 | #53

    #36. BilB, Your proposal is, IMHO, an excellent refinement of the Government’s “… strategy”. Have Uni chiefs suggested it to the government? I wonder how some partially privatised Universities would view your proposal.

    #40. Jill, I did argue for the creation of additional public housing at the time, not long ago, when ‘housing shortages’ and ‘unaffordability’ were the issues. I was under the impression that the Government has budgeted for additional money for the public housing program. I fully agree with you that creating more public housing would also provide support for the building industry in the sense of providing work. However, I’d be surprised if first home buyer grants would be appropriated by landowners as easily under current conditions as say 18 months ago. But then only time will tell. As JQ said, the Govt may have some additional information.

  54. sdfc
    October 16th, 2008 at 19:48 | #54

    Smiths, you say there is not one shred of evidence to support my contention that a lack of supply will support house prices, but then follow up with an abitrary statement that you believe there will be a 40% fall in prices.

    Such a fall would suggest severe recession, something which I believe would see the RBA cutting the cash rate to something with a 3 in front.

    My contention is based on the significant housing underbuild in recent times.

    If you go to the ABS website, download the dwelling approvals data and the civilian population estimate from the labour force release you can construct a chart of the approvals to population ratio. This you will see shows there has been a significant underbuild for a number of years now.

    Nick K, if you find the belief of a housing shortage amusing, you haven’t been paying attention.

    The size of houses has nothing to do with whether there is a shortage of housing or not. Selling up and moving to more modest accomodation won’t do anything to relieve demand pressures, unless of course you think we are moving into a time of mass share housing.

    I’d be interested to know why you believe the demand for housing is so elastic that the huge underbuild of recent years has not led to a shortage of housing. Your contention that there is no fixed supply of housing is certainly novel. Are you suggesting dongas for the major cities perhaps?

    I’m always willing to change my opinion, it wouldn’t be the first time. You have to present some sound reasoning though and your initial effort was poor.

  55. sdfc
    October 16th, 2008 at 19:54 | #55

    Actually Smiths, I’ve changed my mind already. I don’t believe we would see a 40% decline in house prices with anything short of depression and severe social dislocation.

    In that case you can pick your own low for the cash rate.

  56. Smiley
    October 16th, 2008 at 21:12 | #56

    Governments of both persuasions are terrified of the spectre of any sort of deflation in the housing sector. That is why both have supported high immigration rates. If we get to the point where we are regularly using the D word then it will appear to have been an extremly flawed policy.

    According to a report I read in The Australian last week, Rudd has already hinted that the government would cut the immigration rate if the economic situation deteriorated.

  57. Nick K
    October 16th, 2008 at 21:13 | #57

    sdfc, just to clarify my position.

    I wasn’t denying that there is a housing shortage at the present time. That is, there is more demand than supply.

    All I am saying is that those dynamics can change quickly, Particularly if there is an economic downturn. The relation between supply and demand is not fixed.

    As for the elasticity of supply and demand, I agree that there is less elasticity on the supply side. But there is considerable elasticity on the demand side.

    If there is an economic downturn, the demand for housing will fall. If people can no longer afford to pay their mortgages, then more people will have to sell and move to smaller homes. Some people will move in with family and friends, or combine households. Younger adults will be less likely to enter the property market until prices fall. This will all contract the demand side.

    The point is that there is no fixed relationship between supply and demand that will put a floor under house prices. There is a lot of flexibility on the demand side.

    The only thing which puts any kind of floor on house prices is that if prices start falling, investors are less likely to build new homes as they know they are unlikely to realise any profits in a falling market. This stops the supply side from expanding. But I doubt this will be enough to stop a big drop in house prices.

  58. sdfc
    October 16th, 2008 at 23:13 | #58

    Okay Nick fair enough.

    I don’t agree there will be any significant economy wide fall in house prices, but that’s life.

    Don’t be fooled by the big falls in US house prices, there are huge differences between the US and Australian housing markets. They built a bucket load of houses during their boom, we didn’t build enough.

  59. Gojod
    October 17th, 2008 at 08:41 | #59

    As a 23 year old, I welcome falling property prices! Maybe some wealth will be more evenly distributed throughout our society.
    How can young people ever get into the property market when they are forced to pay the mortgage of some X5 driving baby boomer investor every week. It’s honestly like the feudal system of the middle ages the way wealth is controlled in Australia.
    The FHOG is a scam, it only serves to suck more young people into an unsustainable property market. One day it’s going to crash and that’s just going to be too bad for a lot of dumb and greedy people.
    As for older people losing a lot of their super, that’s what happens when you invest your money in stocks fools! It’s like going to the casino, losing half your cash, and then having a sook about it after, like you are a victim or something and you really couldn’t afford to lose that. It was your decision to invest in shares and you probably made a killing during the commodities boom. Some of us elected to save our cash at a bank and why should we bail you out?
    In fact, people shouldn’t even be allowed to invest in high-risk super when they are old, because when it all goes topsy-turvy it’s GEN Y that’s going to be paying their pension.
    The stimulus package won’t give me any money, I’m not going to be wasting it. Can somebody please explain how pensioners buying dog food and burning money on christmas presents is going to save our economy?
    Wouldn’t the stimulus money be better spent investing in sustainable energy, free and better public transport? That would save both the environment and heaps of money in the long run.

  60. Herbert Stock
    October 18th, 2008 at 14:49 | #60

    Today (18/10/08), Paul Krugman, the latest Nobel Laureate in Economics, called on the managers of the US economy to increase Government particularly infratructure spending. Yet in Australia Rudd has announced serious cuts in Government spending on health and education and deferred spending on essential infrastructure. Are these two policies reconcilable?

  61. Michael of Summer Hill
    October 20th, 2008 at 09:53 | #61

    John, if I may reply to Herbert Stock by saying the procrastinating Rudd government is making
    ad hoc decisions which in my opinion have not been properly thought through as is the case with the government’s stimulus package whereby those in real need of a helping hand are being left out in the cold.

  62. joe77
    October 21st, 2008 at 15:02 | #62

    HELLO; WE HAD PROFET IN THIS 2OTH CENTURY, THAT SAID ” THE STOCK MARKET WILL CRASH, AND THE CATHOLIC CHURCH WOULD BAIL AMERICA OUT WITH IT’S GOLD. YOU JUST SET BACK AND WACTH IT HAPPEN. WE ARE IN GETTING RIGHT IN THE CONDITION FOR THAT TO HAPPEN RIGHT NOW. AND THEN WE WILL BE CONTROLLED BY THE CATHOLIC CHURCH. IT WILL HAPPEN.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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