Hoping the bubble bursts

The RBA’s low-interest strategy to stimulate the non-mining sectors has an unfortunate side-effect: worsening housing affordability (“RBA urges borrowers to be prudent amid record-low rate environment”, 25/9). The investments of one generation force up house prices, robbing the next of the chance to own one.

The PM shrugs off the affordability crisis by saying “sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset” (“Tony Abbott puts bubble trouble to bed”, The Australian, 28/9). He seems unconcerned that this leads inevitably backward in time to a two-tier society, divided into landlords who bought when the getting was good, and reluctant renters, effectively serfs, who will never have the opportunity to own a home.

Interest rate cuts are a blunt instrument which cannot distinguish between productive and unproductive investment. Their effect needs to be focussed by a purposeful tax regime.

House price inflation is fuelled in part by pointless tax concessions for unproductive speculation in existing dwellings, which contributes nothing to the economy but a pervasive form of inflation. Good policy demands the removal of these concessions, and a commensurate increase in breaks for productive investment in new stock.

But as long as the Coalition lacks the courage to take the necessary action, the millions forced to rent can only hope the bubble will burst, with all the pain that would cause to the landlord class.

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