It's 2055 and you're searching for a house. Tony Abbott is still the prime minister. He has just turned 98 and is finally considering retirement. But for the past 40 years he has been as good as his word. "I do hope that our housing prices are increasing," he said back in 2015. "I do want housing to be affordable, but nevertheless, I also want house prices to be modestly increasing."
They have indeed been increasing modestly, in each and every year by the average of what they had increased in the previous 25 years.
The agent has found you a beauty. It's typical a Melbourne home, slap bang in the middle of the price distribution at the so-called median. It costs $5 million.
That's right: $5 million. Right now a typical Melbourne home costs $569,500. If prices climb for another 40 years as they have for the past 25, a typical Melbourne house will cost $5 million.
Of course we will be earning more by then. The intergenerational report assumes that wages will climb by 4 per cent per year all the way through until 2055. It's a heroic assumption. Wages have been increasing at nothing like that pace lately. If they do, the average Victorian on a full-time wage will earn $363,470, which sounds like a lot. But it won't be, compared to the cost of a house.
Right now the typical Melbourne home costs 7.5 times the average full-time wage. Back in 1990 it cost 5 times that average wage. By 2055 it would cost 13 times the average wage...
Rising prices mean sliding affordability. Beyond a certain point they have to. It's what made Abbott's claim that he wants both affordable housing and rising prices so silly.
It used to be said that house prices couldn't climb to the level where owner-occupiers couldn't afford to buy them. But it's no longer true. John Howard severed the link in September 1999. A simple change to the Tax Act created a whole new class of buyers for whom occupying the house wasn't the point. They could make big money by using houses as investments, getting someone else to live in them, and selling them later at a profit. From September 1999 only half of any profit they made was subject to tax.
This meant they could afford to pay more than the properties were worth, more than people could comfortably pay to live in them. If their interest payments exceeded their income from rent and they had to record a loss, so much the better. They could use the loss to write down other income and cut their tax. They would make it up later when they sold for a (largely untaxed) profit.
Before the change negative gearing wasn't that common. In 1999 only 650,000 landlords recorded losses. Within five years the number had passed 1 million. It's now 1.3 million, accounting for 1 in every 10 taxpayers. And their losses are no longer small. The average loss has jumped from $4000 to almost $10,000.
The flood of negative gearers has pushed prices to levels that once wouldn't have lacked support. In the decade before 1999 Melbourne prices rose by an average of 4.8 per cent per year. In the 15 years after they've climbed 7.6 per cent per year. They'll keep climbing for as long as negative gearers (who don't much care about prices) outbid owner-occupiers.
Although indifferent to high prices, negative gearers are very concerned about whether or not prices will continue to rise. Their business model depends on housing becoming less affordable. Without the assurance of future price rises, it collapses. Which is why the prime minister's remarks last week gave them comfort. He effectively committed the government to doing whatever it could to ensure that one type of investment always increased in price.
The governor of the Reserve Bank has repeatedly warned that asset prices can go down as well as up. Abbott has negated that warning, for one class of asset.
If investors believe him they'll switch out of risky assets such as shares and businesses into property. And those already in property will gear up further. Already, around 30,000 own five or more properties. Abbott has blown air into the bubble.
It's a furphy to suggest greater housing supply will allow Abbott to keep both of his promises: more affordable housing and modestly increasing prices. If greater supply does make housing more affordable it will do so by cutting prices. Abbott can't have both. And negative gearing is a particularly cumbersome means of increasing supply. Before Howard's tax change, one in every six new investor loans went to build houses. It's now one in 14. Negative gearers are keener to outbid owner-occupiers for existing homes than than they are to build new ones.
The more they succeed in pushing up prices the more Australians will rent. The latest census shows 29.6 of households renting. A decade earlier it showed 27.6 per cent.
What's odd about Abbott's support for negative gearing is that when it comes to foreign investors, he is cracking down hard. Most foreigners are prevented by law from competing with Australians to buy existing houses, and Abbott's determined to apply the law. Around 200 cases are under investigation, 40 coming from tip-offs from members of the public who have 'dobbed in' owners they think might be foreign. Foreign buyers do indeed help push up real estate prices and deny owner occupiers a chance, but that's exactly what negative gearers do. And since 1999 they've had a taxpayer subsidy to do it.
Never before have we had a prime minister who explicitly backs higher house prices. Never before have we had one who effectively promises less affordable housing in the decades ahead and a greater proportion of the population forced to rent. Never before have we had one prepared to make an election issue out of it. "Do not trust this man with your house price," he thundered against Bill Shorten last week. Shorten should respond in kind. Should we trust Abbott with house prices?