To understand why Treasurer Joe Hockey defends the current level of house and apartment prices, you need to understand what would happen if dwelling prices fell sharply. The short answer is there would be a significant economic downturn and probably a change of government.
So what would happen in Australia if there were a 20 per cent fall in dwelling prices, led by Sydney and Melbourne?
Wherever such a fall took place, there would be a large number of households that owed the banks more on their dwelling than the dwelling was worth (i.e. they had negative equity). When this has happened previously (e.g. Melbourne in the early 1990s), it slashed consumer confidence and retail sales and boosted unemployment.
One of the hardest hit groups would be the banks. It is bank lending that has been the mainstay of high house and apartment prices: the banks cannot afford a major fall in dwelling prices. If there were a 20 per cent fall in dwelling prices, bank bad debts would rise sharply and they could be forced to reduce their dividends. Bank share prices would slump. Given that our superannuation savings invested in the sharemarket are concentrated in bank shares, there would be a big fall in superannuation balances.
The next big victims would be state governments and councils. Both these groups do their utmost to keep dwelling prices high mainly by restricting the supply of dwellings via all sorts of gymnastics over approvals and high cost demands.
The councils and state governments know that rising dwelling prices mean more stamp duty, more land tax, more council rates and more water rates. The state governments and councils spend this money on various activities, including infrastructure. This employs people. Falling dwelling prices slash all these incomes and force state governments and councils to either cut back expenditure or borrow. Higher dwelling prices not only create council and government employment, but enable state governments and councils to hold power.
In pushing up the price of dwellings by restricting supply via the approvals process or making very expensive demands on developers, councils reckon they are protecting ratepayers. But in reality they are protecting council income, salaries and employment. Similar forces drive state governments.
As Callam Pickering pointed out this week in Victoria, in 2014-15 property taxes and stamp duty accounted for an incredible 41 per cent of the state’s revenue. In New South Wales, the figure was not much lower at 37 per cent (The states' housing tax sin, June 9).
In a strange way three of the biggest forces pushing up dwelling prices (the banks, state governments and councils) are like drug addicts: they are hooked on keeping dwelling prices at the at current levels or increasing them further.
And given the economic carnage that would be created by a major house price decline, the Federal Government has a similar stake in the higher dwelling price game. Once you understand the game, it’s easier to understand why Joe Hockey made yesterday’s remarks.
Finally, Meriton’s Harry Triguboff points out that the owners of many commercial properties would be hit hard by a fall in prices. And in some cases, so would their bank financiers. The lower patronage of strip shopping centres and the decline in factories would normally have devastated commercial values. Badly tenanted office blocks are in the same category. But large number of these properties can now be sold at high prices because of the demand for apartments.
Any time banks, state governments or councils want lower dwelling prices they can trigger them, but they are simply not going to it because their operations would be devastated. The one area of the game that Australian banks, state governments and councils do not control is Chinese and other Asian buyers.
But Harry Triguboff tells me that Chinese buying, which accounts for 80 per cent of demand for his Meriton new apartment development, is not slacking. So in Sydney, banks, the state government and councils can relax; Treasury's so-called housing bubble is not about to burst. First home buyers either pay rent, borrow big or rely on their parents/grandparents. The other alternative is to change councils and state governments.