Hockey sticks his neck out

I was at a Media Club lunch in Brisbane today where Joe Hockey was the speaker. Amid a bunch of fairly predictable talking points, he offered the view that, if we want to address problems of housing affordability, measures that increase demand, like the First Home Buyers Grant, are exactly the wrong way to go. He’s right of course, and just about every economist who has every looked at the issue has made the same point. Still, given the sacred-cow status of home ownership (both in itself and as a speculative investment) it’s the kind of statement that Sir Humphrey would call “courageous”.

Strikingly, not one of the assembled journalists took him up on it. Instead they bowled him up a series of questions on the kerfuffle du jour regarding the Christmas Island funerals all of which (to mix my cricketing metaphors) he padded away, let through to the keeper or dispatched to the boundary with ease. If I had been looking for a story instead of going through the motions, I would have asked something like “How much could the government save by abolishing FHBG, and where would the money be better spent”.

Given that Hockey has tackled one sacred cow, let me express the hope that some truly courageous politician will make the point that the biggest source of house price inflation is the set of subsidies to owner-occupied housing including exemption from land tax and capital gains tax and exclusion from most means tests. Michael Egan tried to tackle this in NSW, only for houses worth more than $1m IIRC, and got nowhere.

49 thoughts on “Hockey sticks his neck out

  1. Of course, anyone who knows the first thing about economics knows that measures like FHOG just add to the demand side of the equation and help keep house prices high. But that is the whole point. The idea that these measures are actually designed to make housing more affordable is spin aimed at fooling the economically illiterate section of the electorate (i.e. about 90% of the population).

    Governments have a vested interest in keeping house prices high, as
    – there are far more people who either own a home outright or have a mortgage than there are individuals trying to get into the housing market during the medium-term.
    – governments wish to avoid the economic fallout of housing deflation, or at least delay the inevitable while they are in power
    – with an aging population, there is more benefit in catering to the interests of aging retirees and home-owners than younger people trying to buy a home

    The FHOG is a classic case of ‘divide and fool’ politics. Play both sides of an issue by pretending to support one side but actually helping the other.

    Kudos to Hockey for belling the cat on this one.

  2. HC, in Econ 101 the value of land is the capitalized value of future rents net of tax. So, a tax on land will reduce its value by the capitalized amount of the tax liability.

    Replace “rents” with “flow of services and capital gains” and you have the reason why removing exemptions will reduce house prices.

  3. JQ, Yes I think you are right, Eco 101.

    I was thinking about the supply side only and either neutral taxes on fixed factors and profits or taxes that bite and have disincentive effects on supply.

  4. In fact, it is likely that tax exemptions for home owners drive up house prices even more than rational economic theory would suggest. That is because tax evasion has a powerful, irrational appeal to much of the population. The satisfaction some people get from ‘screwing the system’ is more psychologically rewarding than rational calculations of cost-benefit would encourage.

    For example, people will invest in schemes that offer tax breaks even when the investments turn out to be duds and they would have been better off investing in something offering stronger returns but without tax breaks.

  5. @jquiggin

    This looks like regulating capitalism to me, and will not work as described.

    Capitalists may say – OK, my net income in this activity has been reduced, – I will make my next investment in my next available alternative.

    On the other hand, if there is no change in supply, rentsprices will increase because the change is across all suppliers. This means that no capitalist has an incentive, or need, to accept the lower net income (post tax).

    So you need to expand supply and the best policy is to include an increase in public provision (funded by tax or by diverting subsidies).

    This is preferable to rent/price controls. These may still be used particularly as wages are already price controlled.

  6. Monkey’s Uncle, you are blurring the distinction between aggregate demand (at a particular time and place) and housing affordability from the perspective of a sub-set of the population.

  7. Chris, i don’t think your rent control plan makes a whole lot of sense, as we are seeing this huge disconnect betweem the rental market and the ownership market (both occupiers and speculators). The capital gains that people are speculating will occur bear no semblence of rents

  8. @jquiggin
    The preferential tax treatment should explain why house prices are inflated compared to other assets, but does it really give any explanation for housing bubbles, or how they can be prevented?

  9. @jquiggin

    JQ, the result is a partial equilibrium (comparative static) result. Furthermore, to the best of my knowledge it is derived from models that do not have a financial sector at all or merely represent it by ‘the interest rate’ and they do not include compulsory superannuation and tax deductibility of interest and maintenance expenses for investors in real estate but not for owner-occupiers.

    On the applied level, do you mean that house prices will decline because people will build smaller houses on smaller blocks (ie replace existing houses – this is what the comparative static results entail – such that they can afford the after tax flow of services) or do you mean that the prices of existing houses and the associated blocks of land will uniformly decline without anything else happening?


  10. @Chris Warren
    “A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers” Ricardo, 1817.

    “The rent of land represents a return to ownership over and above the return which is suficient to induce use-it is a premium paid for permission to use. To take, in taxation, a part or the whole of this premium in no way affects the incentive to use or the return to use; in no way diminishes the amount of land there is to use, or makes it more difficult to obtain it for use. Thus there is no way in which a tax upon rent or Land Values can be transferred to the user. Whatever the State may demand of this premium simply diminishes the net amount which ownership can get for the use of land, or the price it can demand as purchase money, which is, of course, rent or the expectation of rent, capitalised.

    Here, for instance, is a piece of land that has a value-let it be where it may. Its rent, or value, is the highest price that anyone will give for it-it is a bonus which the man who wants to use the land must pay to the man who owns the land for permission to use it. Now, if a tax be levied on that rent or value, this in no wise adds to the willingness of anyone to pay more for the land than before; nor does it any way add to the ability of the owner to demand more. To suppose, in fact, that such a tax could be thrown by landowners upon tenants is to suppose that the owners of land do not now get for their land all it will bring; is to suppose that, whenever they want to, they can put up prices as they please.” – Henry George

  11. el mono :
    Chris, i don’t think your rent control plan makes a whole lot of sense, as we are seeing this huge disconnect betweem the rental market and the ownership market (both occupiers and speculators). The capital gains that people are speculating will occur bear no semblence of rents

    Rent controls do not make economic sense. However when wages are largely set by politics, or there is a degree of monopoly, a political decision for rent controls, as a last option may emerge.

    Ownership is a problem if owners of rental property all want to get the same returns as resource miners (or some other industry).

    I am not so concerned about owner-occupiers, as the real social problem is at the rental end of the market.

  12. With a land tax, in effect, the government becomes a part owner of the land and charges a rent for that implicit ownership. In principle, the total of that capitalised value of government ownership and the ownership of land and property that remains with the nominal owner should remain unchanged. That is, unless some argument can be mounted for a change in behaviour, attractiveness of owning or financing, amongst those who want to use or own the property and land. Indeed, if the government acts rationally, government might possibly provide a greater quantity of local services to enhance the user value of the land/property bundle, and thereby, increase its tax take. That is, it might even improve efficiency.

    Normal people wouldn’t expect much chance of a negative difference of any significant size, if they expected any negative consequences at all. However, if we move into the alternative universe which we had a glimpse of in John’s “Adventures..” post…. Where freedom reigns… anything’s possible.

  13. @James Haughton

    Ricardo was right as a first effect – there are then second effects. Capital will move so that close to the previous level of profits, is recreated. The end result may be less landlords and relatively crowded housing, but with some other sector(s) expanding.

    Henry George makes no sense to me. Yesterday’s Steve Keen?

  14. El mono, a high land value tax would mean that there was no benefit in speculating on land as the majority of the profit would be taken by the taxman.

  15. @Chris Warren

    In principle, less money would be required to buy the property and land because the property/land bundle would be less by the capitalised value of stream of taxes (the implicit part ownership of the land by the government). The ‘landlord’ would get the same return on this smaller sum of capital (in risk adjusted terms). The distribution of risk might have changed with government’s partial ‘ownership’ of the land. Without venturing into an alternative universe, I don’t see any obvious compelling reason why there should be fewer landlords or a reduced supply of properties.

  16. @Freelander

    The compelling reason is that, under capitalism, capital moves from sectors with low net profits to sectors with high net profits.

    IN the past every economics undergraduate had this drummed into them by having Robert Albon’s paper on “Rent Controls; a Costly Redistributive Device”, [Economic Record, 54(147), pp. 303-313.] thrust down their throats.

    In Canberra the stupid ALP brought in rent controls (“Fair Rent”) without expanding public supply. Capital moved to Queanbeyan so Canberra tenants were probably worse off. This is the first law of capitalism. When the Liberals regained power they destroyed the Fair Rent mechanisms in the ACT Landlord and Tenant Ordinance.

    The fact that, with lower net profits, “less money is required to purchase property” only concerns new production and, anyway, was not observed to occur in the Canberra/Queanbeyan example. But the public sector can step in here.

  17. Capital moves, in principle, because of profit rate. The profit rate, risk adjusted, should, in principle, be the same. I wouldn’t use Robert Albon as a reference anyway and I pity those undergraduates.

  18. @Freelander

    How would the argument go, Freelander, if we go out of the alternative universe of comparative statics and into the current socio-political reality?

  19. I am surprised that there is no discussion of the very culture of home ownership, and the fact that it is anti-capitalistic in the sense that it discourages the movement of labour. I wonder how many of the proletariat (or precariat) paying off the their $0.5m mortgage in the bible-belt in Sydney really feel that moving to the Pilberra to make a huge income is really the best lifestyle choice to make, as a rationally economic choice would dictate.

    Not to mention that home ownership discourages dissent! George Bush was certainly on to it when he encouraged Americans to buy a house. Who wants to rock a system that they own part of (even though they only own the mortgage). In Australia the case is even worse since one cannot post the keys back to the bank (jingle-mail). The only option is bankruptcy. That certainly discourages dissent. Incensed people are moved to get really angry and show their rage by writing a few lines in a blog. Then they go back to their grinding job to pay off the mortgage.

  20. @Ernestine Gross

    When freedom reigns… anything can happen. There, a valid argument is simply any string of non sequiturs… Anything proves everything you desire without risk of inconsistency.

    And just as you can tie and untie knots, change handedness, and do other amazing tricks in the higher bizarro dimensions, entry to, and exit from, one of these universes does entail risks. You could even come back as a member of the Tea Party, or worse still, as the 2012 Republican Presidential candidate.

    I imagine some of those who have visited the other side might possibly have written the argument already. (By the way, I am not sure where ‘rent control’ came from. Rent control is generally silly and ill advised. Although there are circumstances in which it could be well justified as a short-term measure. There are many references on rent control well before Albon. My discussion in #41 and #43 relates to taxing land, not controlling rent. A government with a land tax is in a situation not too much different to someone who is a part owner of the land and rents their part to the landlord who owns the other share in the land and all of the property. As long as the government is relatively consistent and fair in its pricing (land tax) policy there really shouldn’t be any real problem.)

    Without any rent control, a big problem in the ACT, or at least when I was there, was the real estate agents. To avoid their restrictive and costly practices which seemed to include leaving rental properties they could rent vacant, and to otherwise avoid the costs of their not particularly competitive role in rental markets, moving to Queanbeyan might be worth the longer travel to work. Rent controls are not the only problem you can have in practice, and maybe even in principle as well.

  21. @plaasmatron

    That why transferable property rights in labour ought to be given another chance. That way, a sector of the population, for whom home ownership could be quite a burden and impediment to mobility, could be ‘liberated’ from these concerns. [Irony alert. Whatever that is?]

  22. You could be right about dissent. Many on Haiti dissented when they had been relieved of the burden of property ownership, a burden which had generously been taken up by others, but France did manage to get them to recompense those generous property owners who suffered terribly from their dissent.

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