Economist Dr Cameron Murray delivered a lecture at the University of Queensland entitled “Why politicians must pretend to want cheap housing”, which explains why the contemporary debate about housing affordability is a “distraction promoted by vested interests and reinforced by political incentives”.
In particular, the terms “affordability” is a “covert signal” used by politicians and the property industry to enact policies that benefit industry:
The beauty of a covert signal is that the true meaning is known only to the target audience. In this case, large property owners and developers. They know that affordability means that absolutely nothing will be done that puts the value of their property assets at risk. To them, the word is an invitation to participate in the next great property scam.
They know that to appear to be doing something about affordability, their political mates will simply ask them what policies they want. Whatever tax break, rezoning, or subsidy they come up with will then become the nation’s new “affordable housing” policy.
It is no leap to say that these outcomes are in fact the real objective of pretending to care about cheap housing by distracting us with the word affordability…
Affordability is a long word that hides the real aim of boosting the asset portfolios of major property owners behind the declared aim of making housing cheaper for residents.
According to Dr Murray, there are three political economy issues at play that drive this process:
- Electoral logic – “Sixty-five per cent of Australian households own their own home, with eighteen per cent being landlords, and both sets of property owners generally skewing toward the highest-income households, as well as older households”. Thus, “the electoral calculus on heavily on the side of satisfying the majority who benefit from higher prices, not lower ones”. Accordingly, “a policy that reduced home prices by 30% would wipe out $3 trillion of value from household balance sheets, hitting the highest income and most politically influential households the hardest”.
- Personal finances – Politicians themselves own a lot of housing – 2.3 properties each on average at the federal level. State and local politicians also own a lot of property. Why would they enact policies that lower their net worth?
- Macroeconomics – For decades, Australia and its peer nations have used the housing market as a macroeconomic stabilisation tool. Whenever there is economic trouble on the horizon, the RBA has responded with lower interest rates. And this has driven the massive surge in housing values in Australia and abroad.
The upshot of these three political economy drivers is that together they “reveal the motivation for keeping prices high and hence only pretending to care”.
Dr Murray concludes with the following statement:
We’ve been led to believe that housing is a difficult problem when it’s not. We only made it difficult because we eliminated from the debate the only effective policies because they involved active public involvement in land and housing markets.
The government housing interventions Australia had in the 1950s and 60s worked to get the outcome of cheap housing. But Australia then was a different place, with homeownership at only 50% after the war, and there was immense political pressure from returned soldiers and their families to make cheap housing options available.
Instead of three political economy issues that generate today’s game of pretend, there was just one—the personal finances logic. But the electoral logic was on the side of cheap housing, and the macroeconomy was managed via public spending in a similar manner to the wartime period, so there was no macroeconomic conflict either.
When we really dig down, we can see the housing solutions that worked in the past and that today work elsewhere.
The solutions are not difficult. The politics is. Until we stop pretending, nothing will change.
Brilliant stuff. The full essay, which also debunks a bunch of housing affordability gimmicks (like build-to-rent) can be read here.
You can also subscribe to Dr Murray’s work via his Fresh Economic Thinking Substack site.
