Home truths

Also timely, this forum is happening tomorrow in Surry Hills, near Central Station. Get in touch for the address, it’s in an office block rather than a public venue.

The Great Australian Dream (Nightmare?)

Secure, affordable housing is fundamental to any worthwhile conception of the ‘good society’. Housing is also a source of inequality, of identity, and a locus of recurrent bouts of speculation. The powerful interplay of these factors – housing as security, as a source of identity, as a speculative asset class – combined to lay the foundations of the subprime debacle in the US. With Australia yet to feel the full force of a recession induced slump in the housing market, it is imperative that progressives consider alternatives in housing policy that prioritise social justice and attempt to reduce speculation.

Date: Wednesday, April 1

Time: 6.30pm

Guest speakers:

Frank Stilwell

How significant is housing in promoting speculation in the economy? How could the negative consequences of such speculation be reduced? Is land tax part of the solution? How would it work? Is it politically feasible in the context of the crisis?

Prof Frank Stillwell is a well known advocate of alternative economic strategies which prioritize social justice and sustainability. He has taught for 36 years at the University of Sydney and has been awarded the University’s Award for Excellence in Teaching. The author of eleven books, his research interests centre on Australian economic politics, urban and regional development and economic inequality. He is the coordinating editor of the Journal of Australian Political Economy. He is also the Economics Spokesperson for the NSW Greens Working Group.

Louise Crabtree

How have Community Land Trusts faired during the housing crash in the US? Why has the experience been different to that of other forms of property tenure? What is happening in terms of establishing CLTs in Sydney (Australia)? How can this process be expedited?

Dr Crabtree is currently Research Fellow and Research Program Coordinator at the Urban Research Centre, University of Western Sydney. She has researched and worked in urban community gardens and affordable housing in Australia and the United States and has a particular interest in the interactions between forms of property tenure and sustainable livelihoods in cities.

Adam Farrar

What is the current trajectory of housing policy at the State and Federal levels? Have there been any positive developments since Rudd’s election? Where are the major gaps in housing policy? What should be prioritised from a campaigning perspective?

Adam has worked in the community welfare sector for more than 20 years, working in various capacities for peak bodies in areas such as the Future of Work, Urban & Regional Development, and Housing. For many years now, he has particularly worked on community housing, as Executive Directors of the National Community Housing Forum and currently as Executive Director of the NSW Federation of Housing Associations.

General questions to consider:

1. How will (should) Australia cope with widespread mortgage defaults that may occur over the next few years?
2. Is it possible to build a popular campaign against such measures as negative gearing, home saver accounts, first homebuyer grants etc?
3. What policies would more effectively cater for the long-term housing needs of Australian society?

Battellino on house prices

Reserve Bank of Australia Deputy Governor Ric Battellino has waded into the Scandalum Magnatum controversy, laying out (again) the central bank case on Australian housing in a speech today. No mention of rents. Putting this up for what it’s worth, since he evidently does not have time to post it into the comments directly.

This market was fairly subdued in 2008, with prices falling on average by 3 per cent across Australia. Some states – such as Western Australia which had a late boom – are now experiencing larger falls than average.  Prices at the top end of the market have also been softer than other segments, no doubt reflecting the deleveraging that is taking place among high‑income households following the global financial crisis.

Overall, however, the housing market in Australia has held up pretty well compared with that in countries such as the US and the UK, where prices have fallen in the order of 20 per cent.

We continue to believe that the market here will hold up better than overseas. There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere. By and large, the great bulk of Australians who took out housing loans have been able to afford the repayments. Notwithstanding some rise over the past year, the 90‑day arrears rate on housing loans is only 0.5 per cent, which is broadly in line with its long‑run average and well below that in countries such as the US and UK.

In the period ahead, there will be forces pulling the arrears rate in opposite directions. On the one hand, as unemployment rises, more households will have difficulty continuing to service their housing loans. On the other hand, the very large reduction in interest rates has greatly reduced the debt servicing burden of households. On an average-sized mortgage, loan repayments are now $7,000 a year less than they were six months ago. This is a very large reduction, equal to about 8 per cent of average household income.

The majority of households have chosen not to spend the money that has been freed up. Rather, they have maintained high repayments and are therefore moving ahead of schedule in repaying their loans. This will give them breathing space if they do subsequently find themselves in circumstances where their repayments are interrupted.

Trouble at home

In their ‘theses on the crisis’, which I posted a month ago, Panitch and Gindin present the ascension of bank nationalisation onto the political agenda as an opportunity for some revolutionary leverage: it “provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism”.

This doesn’t have much resonance in Australia, because the banks here are not in big trouble; in fact they’ve been strengthened by the collapsing fortunes of their finance company rivals. Bank nationalisation is not on the agenda.

I wonder if housing isn’t a better focal point here. Australia hasn’t seen a housing bust to the extent the US and UK have, and it doesn’t seem likely to, except in the top end of the market. The reason is that housing demand has been outstripping supply, due mainly to population growth. According to Treasury, the increase in demand for dwellings started taking off above the supply of new dwellings in 2005.

New housing construction has fluctuated around a fairly constant mean since at least the early 1990s. The construction slump of the mid-1990s reflected a housing stock that had grown faster than the demand for it. But demand caught up, and for most of the next decade, supply and demand circled one another. So far, so good, the economist might say, supply and demand correcting each other and tending towards balance.

But the market adjustment story has some problems. Between 2000 and 2006, the median first-home price doubled. Why, when underlying supply and demand for dwellings were reasonably matched? The answer lies in the investment demand for houses and the easy availability of finance for it.

Meanwhile the supply of new dwellings moved up and down around its long-run average. Why didn’t the rather deafening price signal motivate an equivalent expansion of supply? Presumably because the construction industry has limited capacity, and faced workforce and materials constraints on its growth.

Now, given projected population figures, a decent case can be mounted that housing demand is going to outstrip supply for the foreseeable future, which is bad news for people who don’t own houses. The real estate industry can argue that there was no bubble in Australian real estate, that investment buyers were correctly forecasting the future. But if this is true, the price mechanism has epically failed to increase the capacity of the construction industry to provide for society’s housing needs.

If Treasury’s population projections are accurate, the construction industry needs to be much bigger, in absolute terms and as a proportion of the workforce, if these needs are to be met. There are those who see that as Australia’s way out of the recession – a movement of workers out of manufacturing and mining and into construction… But that requires a (financed) boost to construction demand from somewhere, which so far exists only in government and industry prayers.

The alternative is demand-side adjustment, which is what’s taking place now. This means the burden falls predominantly on renters – a pool of renters swelled by frustrated would-be homebuyers (although house purchase affordability has increased to some extent with the fall in interest rates and the increased first-homebuyers’ grant). Renter adjustment means some combination of more crowded households and an acceptance of higher rents. Higher rents are a flexible pressure valve because rental demand is pretty inelastic since everyone has to live somewhere, so it will crowd out other items in the household budget before households exit the market (to live with relatives, in caravan parks, etc. – which, incidentally, are already trends too).

Finally, demand side adjustment could come from reduced immigration. This is the reactionary solution. While I don’t doubt that this is going to a chronic pressure point in Australia, it’s not a nice way to go. (Disclosure: author is an immigrant and renter.) It also just shunts pressure elsewhere in the system, into the pensioner quagmire, since increased immigration is Treasury’s solution to an ageing population.

It’s obvious all over the world that housing is a fragile point in post-2000s capitalism. Housing is both a human need, and a financial vehicle for savings and speculation. House prices in Australian politics are what Americans call a ‘third rail’, i.e. what governments stay clear of for fear of instant electrocution. The Labor government’s strategy on housing focuses entirely on that small subset of policies that can be portrayed as simultaneously supporting house prices and making them more affordable. Unfortunately, ‘more affordable’ means ‘cheaper’, which, you will note, is synonymous with ‘lower prices’.

For a large proportion of the populace, including much of the working class, the house is almost as important as a financial asset as it is a place to live, given the uncertainty of living standards after retirement. Therein lies a deep contradiction, which only a radical socio-political shift can resolve.

Panitch and Gindin on the US dollar

From comments here it seems like the meaning of current account imbalances is a big problem for people thinking about the crisis. I just got the new book edited by Leo Panitch and Martijn Konings, American Empire and the Political Economy of Global Finance, in which this gets some discussion. I thought I’d post the entire section of the chapter by Panitch and Gindin where they set out their point of view, because I don’t think they’ve elaborated it as much elsewhere. There’s a later chapter by Scott Aquanno entirely devoted to the role of US Treasury securities in global bond markets which is also extremely relevant; haven’t read it yet but from a skim it looks very good – will post something shortly. I’d be interested to know what people think of this, what needs clarification, etc.

Yet balance of payments deficits did not have the same meaning for the United States as they did for any other state [under Bretton Woods]. This was not widely recognised at the time, but as an obscure paper prepared for the Federal Reserve of Boston pointed out: ‘[t]his asymmetry appears to be appropriate for it corresponds to an asymmetry in the real world’ (quoted in Hudson 2003: 327, italics added). [FOOTNOTE: Kindleberger (1981: 43) was one of the few economists in the 1960s who questioned the significance of the balance of payments crisis in the US, arguing that the deficit largely reflected the American supply of financial intermediary services through borrowing short-term capital and lending long in terms of foreign investment – a ‘trade in liquidity profitable to both sides’ – rather than a trade deficit or over-investment abroad as was commonly understood.] Before this perspective could be universally accepted (especially amongst bankers), however, the fiction of a gold standard behind the dollar standard would have to be abandoned and replaced not only by flexible exchange rates but types of global financial markets that could sustain them. And it would come to be seen that, far from necessarily representing a diminution of American power, the outflow of capital and the balance of payments deficits were actually laying the basis for a dollar-based credit expansion and financial innovation, both domestically and internationally – what Seabrooke appropriately calls the ‘diffusion of power through the dollar’ (2001: 68). Above all, it would be necessary for the American state, as the imperial state, to retain the confidence of the ever more dynamic and powerful financial capitalists in the face of pressures on the dollar. All this implied addressing the deeper contradictions of the Bretton Woods arrangements for fixed exchange rates and tying the dollar to gold, which by then had become a barrier to the American state’s capacity to navigate between its domestic and imperial responsibilities. [pp. 26-27]

… [fast-forward to the 2000s]…

The widespread predictions that the ballooning US trade deficit portended a much more serious crisis waiting to happen were based on the expectation that this deficit was likely to prove unmanageable because it was bound to undermine the dollar as the imperial currency. But it is also necessary to put this in historical perspective. When the balance of payments deficit first emerged in the early 1960s, it led to what now is generally seen as an excessive panic. Robert Roosa, speaking from his experience of trying to address the problem within the Treasury, concluded prophetically in 1970: ‘Perhaps, by conventional standards, the United States would have to become a habitual renegade… barely able to keep its trade accounts in balance, with a modest surplus on the current account, with an entrepot role for vast flows of capital both in and out, with a more or less regular increase in short-term dollar liabilities used for transaction purposes around the world’ (quoted in Hudson 2003: 319).

In the 1970s it was widely assumed that the American trade deficit would necessarily lead to American protectionism. There has certainly been plenty of nationalist sentiment in the US, but rather than withdrawing from world markets the American state has consistently used the threat of protectionism to beat down foreign opposition to the global neoliberal project, thereby transforming ‘nationalist impulses into strategies for opening up other nations’ markets’ (Scherrer 2001: 591). The continuous deficit since the 1980s did not alarm investors. Even while that deficit increased dramatically in the early years of the new century and peaked at almost 6 per cent of GDP by 2006, this did not scare off foreign creditors. To understand this properly it is necessary to reconsider what is often seen as a structural decline in manufacturing competitiveness. While American foreign direct investment continued to expand through the 1990s, manufacturing at home in that decade actually grew faster – much faster – than in any of the other developed countries.  Furthermore, the US led the rest of the G7 in the growth of exports right through the 1980s ad 1990s. The US trade deficit was thus not caused by a loss of manufacturing and export capacity but by the enormous importing propensity of a US economy which experienced much greater population growth, and had a much greater proportion of its population working – and working for longer hours – than in any other developed capitalist economy. Imports contributed to lowering the cost of reproducing labour and obtaining both low- and high-tech inputs for business, each of which facilitated low inflation at home as well as increased exports. There were, of course, particular sectors that were hit hrd by the restructuring of American industry, but the overall picture was one of a relatively strong capitalist economy which, while being able to import ever more by virtue of its relative financial strength.

In considering whether the inflow of capital implies that the US economy is vulnerable to capital flight, it is once again important to note that the inflows did not come in just as compensation to ‘cover’ the deficit, as imagined by those focusing exclusively on international trade statistics. The inflow of capital was mainly the product of investors being attracted by the comparative safety, liquidity and high returns that come with participating in American financial markets and the American economy. The dollar stayed at relatively high levels until recently because of that inflow of capital, and it was the high dollar that allowed American consumers and businesses to import the foreign goods cheaply. In recent years the inflow mainly came from central bankers abroad motivated by the goals of padding their foreign exchange reserves and limiting the decline in the value of the dollar relative to their own currencies.

All this precisely reflected how the new imperialism had come to differ from the old one. While financial markets in the old pre-First World War imperialism were quite developed in terms of the size of capital flows, they generally took the form of long-term portfolio investment, much of it only one way, from th imperial centres to the periphery. In contrast, international markes in short-term securities today are massive and, in the absence of the gold standard, it is American Treasury bills that stand as the world’s monetary reserves. In addition, the old imperialism limited the extent of manufacturing in the third world, while the division of labour in the new imperialism has, by way of foreign investment and outsourcing, included the expansion of manufacturing in the third world. This not only contributed to the American trade deficit but as the trade surpluses, espcially in South-East Asia, were recycled into capital flows to the US, it also contributed to making the imperial power itself, remarkably, a debtor in relation to some third world countries. Yet at the same time these very developments sustained the American economy’s ability to have privileged access both the the world’s savings and to cheaper goods.

Even though the recent downward adjustment of the dollar relative to other currencies has reduced the size of the trade deficit, a major speculative run on the dollar is of course not impossible. But the form that the globalisation of capitalism now takes makes this less rather than more likely. The largest holders of the dollar in Asia and Europe (the respective central banks) want to block the dollar’s collapse because that would threaten their exports to the US, and because it would devalue the dollar assets they hold. The global economy has developed with and through the dollar as the dominant currency, and there is no ecidence to date that the only other remotely serious candidate, the Euro, is about to replace the dollar in this respect. This is primarily not an economic issue but an imperial one – and neither Europe nor Japan has shown either the will or the capacity to displace the US from its leading role in the capitalist world. In contrast to the old paradigm of inter-imperial rivalry, the nature of current integration into the American empire means that a crisis of the dollar is not an ‘American’ crisis that might be ‘good’ for Europe or Asia, but a crisis of the system as a whole, involving severe dangers for all. To suggest that because the holders of American Treasury bills are now primarily in Asia we are therefore witnessing a shift in the regional balance of power, is to confuse the distribution of assets with the distribution of power (Arrighi 2001). [pp. 40-42]