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. So a tax on capital gains would increase the supply of housing and thereby reduce price increases. Or would it reduce quality upgrades thereby reducing price growth? A tax on land would make Henry George supporters happy and please Frank Ramsey but would it also increase housing supply reducing price increases. Maybe.

    If you tax capital gains would you also make interest payments tax deductible as for other asset purchases?

    I think we need new cities and more land being made available in this land abundant country. If we don’t wish to do this cut the migration intake.

  2. Pr Q said:

    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.

    Gotta love the way that Joe smashed the banks the other day. All the usual suspects came out of the would-work and tut-tutted about the way he impugned our free enterprise system. That is just before the banks slugged us with another interest rate rise about twice the size of the increase in the cash rate. He made them all look like fools or lick-spittles of the bourgeoisie. Put a super-profits tax on the banks is what I say [sound of demagogic tub-thumping]

    Housing is sacred to Australians. Other countries have their museums, we have our back-yards. Politicians touch this third rail at their peril.

    On the subject of house price inflation over the noughties the driving forces have been factoral, financial and fiscal, in the following order of priority:


    Immigration expansion – two million net immigrants, plus Kiwis, plus 457s.
    mineral boom generating a cashed-up class of aspirationals looking to trade-up
    land restriction – zoning and speculative land-banking has locked up alot of land
    smaller households – empty nesters, single hipsters and gays
    larger sized houses & rooms


    glut of cheap Asian capital (yen then yuan) being carried into the AUD
    upsurge in negative gearing on residential property investment
    slashing the capital gains tax on residential property investment
    exemption of owner-occupied housing from capital gains tax
    massive tax exemption for self-funded superannuants
    big four banks utterly mollycoddled by federal government
    property developers utterly mollycoddled by state government


    First home owners grant

    AUS has gotten away with its housing price inflation largely because of the massive influx of high IQ Asians has put a floor under the rental market. Just as the mineral boom has raised the ceiling of the prestige end of the market. So long as the rental earnings generated by these folk (plus tax deductions) cover the cost of servicing the debt there will be no housing price deflation, although capital growth will no doubt “taper off” to the more traditional 5% rate, about half the 10% rate that prevailed during the peak of the boom.

  3. An interesting claim I heard in China was that over the next decade population growth will cease as the one child family policy kicks in. The property market should take a walloping. Interesting implications for Chinese monetary policy.

    The economic historian Brinley Thomas traced all business cycles to housing price cycles. I’ve read the same idea recycled recently by US macroeconomists. Immigration is underpinning the strength of the Australian housing market. Longer-term this underpinning will become insecure as folk get nervous about the level of the intake or we have a recession or both.

  4. At first I thought it was the Community Reinvestment Act that caused the subprime crisis, when all along it was just low black and latino IQs!

    If they had been Asian, they would have been smart enough to read the banks’ fine print.

  5. Jack, nothing more on race and intelligence in any comment on this blog please. I think I’ve asked this before, but I’ll spell it out now. Anything further on this topic will result in bans and deletions.

    Any replies to the sandpit please

    And absolutely nothing like this on Crooked Timber. Any race-related comment from you there in future will bring about a total and permanent ban at both sites. Please interpret this strictly. As far as CT goes, anything from you mentioning race, intelligence, genetics, demography, culture, or population is strictly forbidden from now on.

  6. To be fair, i interpretted Jack Strochi’s remark as rents are being propped up by foreign students. Rather than a general statement on the IQs of asians compared to other races. Rents are still far to low to financially justify house prices, except maybe army towns like Townesville and Darwin

  7. Australian house prices are not sustainable at their current values. These values have gone too far beyond fundamentals. Steve Keen’s Debtwatch site, provides a host of empirical evidence in good graphicasl form. The fundamental factors are the ratio of average house price to average income (now several factors too high) and rent returns on capital invested (likely to decline).

    As soon as any government removes the FHOG and othe perverse incentives which inflate the housing market, this market will collapse under its own weight.

    I’m trying to convince my good wife that we should sell out and live rental until after the crash. Then we could buy back in at about half price on my guess. However, I am not winning that argument (nor any other). 😉

    The thing is, picking the timing of a crash (even a crash that must happen) is very difficult.

  8. @el mono

    It is not that “Rents are still far too low”, but rather, house prices are far too high.

    Rents are based on wages and etc but our house prices are based on capitalist speculation and increased per capita debt.

    I suspect that the real problem is that, unlike previous decades (1950’s 1960’s) there is little public housing stock, and all tenants have to face capitalist landlords who are being driven by capitalist bankers (who are wallowing in wealth).

    House rents should be fixed by law, and any supply problems addressed by public housing in the short-term and population policy in the long term.

    Full-fee international students, double incomes, and group renters also disrupt normal market signals for rents.

    So it appears to me that rents are too high, and house prices are far, far too high.

  9. @hc
    Mason Gaffney, the Georgist economist, has done some good work on housing and real estate bubbles and their links to financial crises, particularly the current one. I think the prospect of suppressing housing bubbles without painful high interest rates is one of the most attractive aspects of unimproved land value tax thinking.

  10. Investors seeking to make returns via capital gains on property (as opposed to via rent income) are a strong source of property market volatility that we really want to remove. They pile into the market when expected gains are high and desert the market when expectations turn down. A good start would be a return to the old capital gains regime for investment property. A next step would be to introduce this for owner-occupied capital gains above a high threshold (eg $100,000 per annum).

  11. @Ikonoclast wrote:

    I’m trying to convince my good wife that we should sell out and live rental until after the crash. Then we could buy back in at about half price on my guess.

    Interesting idea, but…

    As a casual observer, it seems to me that the small speculators in the housing market will generally try to ride out the slump and sell only when they must. Unless there’s an interest rate shock (unlikely, I think) you won’t get a crash, rather a flat or slightly negative nominal price period for a number of years. With a few percent inflation and an average couple of percent drop a year you get a significant real drop over number of years, eg, 0.94^8 = 0.6.

    If you sell and invest your equity you’d be paying tax on dividends and gains. Could you pick the time to move back into home ownership? How long are you willing to hold out?

  12. Kudos to Hockey for coming out against FHOS and similar. It’s a small step and his nonsense on the banks speaks against him, but nevertheless, one ought to give credit where it is due.

    Now if he could come out in favour of stiffer residential housing credit rules …

  13. Oh … and since I’m handing out bouquets to Hockey, he can also have one for deviating from the coalition line on the Christmas Island funerals.

    It’s fairly obvious, and I’m loathe to praise someone for motherhood statements, but in these times, perhaps it’s needed.

  14. I wrote a reply to Jim Birch but lost the post as often happens to me with JQ’s site. JQ, in all politeness i must say your site really does need a major upgrade.

  15. Australian house prices are not sustainable at their current values. These values have gone too far beyond fundamentals.

    I guess housing property in Australia is now regarded as being very close to risk free. That would justify rental yields of less than 3%, even when the capital growth rate must enevitably fall back to something sustainable. I say inevitable because housing loan debt, and consequently interest, has been rising at 15% per annum for a long time. At that rate, the entire income of wage and salary earners will be spent on housing loan interest within 20 years.

  16. IIRC Egan’s tax on residential land >$1m (at a time when median Sydney prices were much lower than they are now) met with a lot of INTERNAL Labor opposition – it turned out that surprisingly many apparatchiks in the worker’s party in fact belonged to the rentier class.

    But it also foundered on a campaign against it by the Daily Telecrap and Alan Jones. I particularly remember the front page story about a near-destitute widow in Vaucluse who would be forced to borrow against her harbourside home to pay the tax – it really tugged at my heartstrings.

  17. Joe Hockey said what had to be said, so I don’t feel particularly inclined to hand him bouquets for that—I Just won’t chuck a brick at him.

    Morrison, Abbott et al, on the other hand…they are beyond redemption. Even if your political antennae are saying “here be waste, lets hammer the gummint on it”, can a person be moral yet think it is perfectly acceptable to be arguing over the cost of flying an asylum seeker to the funeral of their child/parents/family? What do they put into the water at Parliament House, if that is the mentality of the leadership team of the opposition (Hockey excepted)?

    As for the FHOG, chuck it please, and thank you Hockey for bringing it up a few years too late. Better too late than never, I guess. The real opproprium should be directed at the somnolent journos; surely Hockey’s words on the issue of the FHOG are newsworthy?

  18. Now that Hockey has given them the political cover, there is nothing to stop the government from simply abolishing the FHOG. Apart from its beneficial effect on the housing market, it will save them a lot of money.

    Re Harry above, owner occupied housing should be treated the same as investor housing, so CGs should be taxable, loan interest deductible and so on.

  19. Or alternatively, Uncle Milton, “owner occupied housing should be treated the same as investor housing” such that interest on loans and maintenance expenditure is to be paid by investors out of after tax income.

    I prefer the alternative because housing should be isolated (not encouraged by tax laws)from (price) speculative investment behaviour while not preventing people from buying a second or third or xth house or unit from after tax income. Moreover, public housing is, imho, a plausible policy to bring income (including welfare payments) and rental expenditure in line.

    As an interim measure (to smooth transition within a specified time frame), 50% of interest and maintenance expenses could be made tax deductable for both, home owners and investors.

  20. No one has addressed my simple inquiry. How will levying a land tax and a capital gains tax on owner-occupied housing reduce house prices? That’s John’s claim – I don’t really see it.

  21. hc :
    No one has addressed my simple inquiry. How will levying a land tax and a capital gains tax on owner-occupied housing reduce house prices? That’s John’s claim – I don’t really see it.

    I think you may have deliberately reinterpreted Quiggin’s statement.

    So naturally you will be ignored.

  22. ‘…..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’.

    Deliberately misinterpreted?

  23. Obviously.

    Just compare #24 to #22.

    Two different issues.

    Whether removing subsidies would have beneficial effect, depends on whether the released funds (or increased revenues) are then used to expand supply.

    Taxing (over a threshold), and using the funds to expand supply may work too.

    It all depends on various factors – population increase being one.

  24. 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.

  25. 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.

  26. 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.

  27. 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.

  28. @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.

  29. 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.

  30. 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

  31. @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?

  32. @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?


  33. @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

  34. 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.

  35. 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.

  36. @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?

  37. 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.

  38. @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.

  39. @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.

  40. 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.

  41. @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?

  42. 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.

  43. @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.

  44. @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?]

  45. 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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