Ever since Freakonomics, economists have been boring spouses and dinner party guests everywhere, under the misconception that everybody is delighted and astounded by the counterintuitive wonders of the economist’s view of the world. Unfortunately most of them do not study things like why today’s bikie gangsters have crazy names like Ismail, Maher and Mahmoud, and no bikes; or why university graduates tend to live with their parents. Instead, they study things like the efficiency of the tax system or game theoretic approaches to optimal auction design.

Treasury Secretary Ken Henry fancies himself a bit of an accidental undercover economist too, and lightened up an Australian Council of Social Service conference with some wacky economic conundrums and paradoxes. “How much inequity should we allow?” was the speech’s title, which the cheeky rogue admitted was “mildly provocative” on purpose, designed to “help pique your interest”. Now an audience of luminaries from the ‘community services and welfare sector’ might think they know all about inequality. But had they ever thought about it like an economist?

On the other hand, take company tax, which at first glance would be of most interest to wealthier Australians. Reducing it would seem to be inequitable. But there are strong arguments to the contrary. In the face of competition from countries with low company tax regimes, higher company tax rates could work to reduce overseas investment in Australia, which could reduce the number of jobs available, lower the demand for Australian workers and, in this way, lower wages. This is the reason why many economists argue that, in the long run, company tax affecting mobile capital is paid by labour — predominantly geographically immobile unskilled labour.

The genre convention is to use each of these lighthearted OMG! flashes of enlightenment to illustrate a serious economic principle. In this case, the tenets of welfare economics. You see, society chooses the level of inequality, presumably by delegating one of its members to review the tax and transfer system. (“…and because it now appears to bear my name, I have even more incentive to get it right!”) But not in circumstances of its own choosing, because a fully equal society, which the Treasury secretary is as committed to as anyone (“a deep respect for the writings of Amartya Sen”!), dulls incentives. The point is to find exactly that optimal point where inequality is just motivating enough but not so motivating that it engenders “capability deprivation”, because once you’ve come down with capability deprivation, all the motivation in the world is liable to just make you sit around smoking ice all day then knife your bunkmate at the Salvation Army.

Granted, the sweet spot is hard to find, and ultimately it’s a trade-off which society weighs up carefully in the mind of its designated reviewer of the tax and transfer system. And it seems that this mind is concluding that as society we are altogether too equal and not motivating enough, given the immense labour shortage Treasury sees right round the corner. Again, the exactly correct mix might be a wildly utopian ideal, but Henry has put together a potentially achievable minimum platform:

  • the Newstart allowance (i.e. the dole), at around $225 a week, is not motivating enough and should be made more motivating so that the recipient feels more like getting a job or training.
  • The Disability Pension, at around $300 a week, is great at motivating people on the Newstart allowance to fake a disability or concoct a depression, but not so great at motivating the partially disabled to return to work or training, which is crazy because work “could make them happier and healthier and our society more equitable”.
  • Public housing rents set to 25 per cent of income are discouraging workforce participation because were the unemployed recipient to get a job their rent would rise; there may be more health and happiness to be found in the incentivising arms of private landlords. Of course, the welfare system should still assist by providing some funds for the renter to pass on to said landlords, so long “of course” as the level of rental assistance recognised “that compromise would be needed to balance incentives to work with some stability of tenure for tenants.”

Those irreverent economists!

Published in: on 5 April, 2009 at 1:05 pm  Comments (1)  

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?
Published in: on 31 March, 2009 at 4:27 pm  Leave a Comment  

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.

Published in: on 31 March, 2009 at 4:23 pm  Comments (1)  

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’s theses on the crisis

Leo Panitch and Sam Gindin, who I have an awful lot of respect for, have just put out a little essay: “From global finance to the nationalisation of the banks: eight theses on the economic crisis”. Quite a few wildly different schools of thought on the crisis have emerged in radical circles, so breaking the argument down into eight discrete points is really helpful for focusing debate. In particular, this will attract flak from certain circles: “Even though the spheres of capitalist finance and production are obviously intertwined (in significant ways today more than ever before), the origins of today’s US-based financial crisis are not rooted in a profitability crisis in the sphere of production, as was the case with the crisis of the 1970s, nor in the global trade imbalances that have emerged since.”

As it happens I’m pretty much behind the Panitch and Gindin school. I’ll post the points here as a spark for discussion, but go check out the whole document.

1. The current economic crisis has to be understood in terms of the historical dynamics and contradictions of capitalist finance in the second half of the 20th century.

2. The spatial expansion and social deepening of capitalism in the last quarter century could not have occurred without innovations in finance.

3. The competitive volatility of global finance produced a series of financial crises whose containment required repeated state intervention.

4. Both finance’s central role in the making of global capitalism and the American state’s role in sustaining it produced the bubble that emerged inside the US housing sector.

5. The inevitable bursting of the housing bubble had such a profound impact because of its centrality to sustaining both US consumer demand and global financial markets.

6. The crisis reinforced the centrality of the American state in the global capitalist economy while multiplying the difficulties entailed in managing it.

7. The scale of the crisis today is such that nationalization of the financial system cannot be kept off the political agenda.

8. The call for nationalization of the banks provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism.

Published in: on 26 February, 2009 at 2:01 pm  Comments (5)  

Independent monetary policy

What is interesting about the banks raising their mortgage rates independently of the Reserve Bank moving the cash rate? It’s a symptom of a shift that could ultimately be more important than the immediate cause, the global credit crunch.

It’s the first time such a rise has happened in ten years. But movements the other way have been more common, narrowing the gap between the cash rate baseline and the banks’ lending rates. The reason was the entry of all the new mortgage broking firms. These firms started the securitisation trend we now hear so much about. They lent to home-buyers, but offloaded the loans as soon as possible onto third parties. They did this by issuing securities (i.e. bonds) tied to the payments from the mortgages. This meant that their own money was tied up for only the short period between signing the mortgage and selling the mortgage-backed security. So smaller companies could muscle in on the banks’ business. Of course the banks got in on the action and issued their own asset-backed securities. This competition lowered the margin between the cash rate and the rate mortgage borrowers pay.

Another effect was to change the nature of mortgages. Previously, a mortgage tied up a single organisation’s funds for decades. The availability of mortgages was thus limited by the amount of funds that could be tied up like that. But with a market for mortgage-backed securities, no individual organisation’s funds were committed for so long. If they needed cash, they could sell the securities. Now mortgages could be funded out of a broader pool of funds – they could sit alongside bonds and shares in portfolios of instruments that can be sold at will. They were more liquid than old-school mortgages, in other words. I imagine this development was partly responsible for the housing binge and bubble of the 2000s.

But there’s another thing. These markets were quite international. Mortgages in Sydney, Auckand, Perth, etc, could be funded by securities sold on markets in New York, London, Tokyo – at the interest rates prevailing on those markets, exchange rate risks hedged off with derivatives. The fact that interest rates were lower there than in this part of world for the whole decade so far made it profitable for firms to do this. But of course the Reserve Banks of Australia and New Zealand had no influence on those interest rates. In fact a couple of years ago in New Zealand the central bank was extremely frustrated that its hikes of the base rate did not flow through into mortgage rates. It wanted to cool the housing market, but the gears of the monetary policy machine were slipping.

Now things have gone into reverse in the credit markets. Pressure is going the other way. But the point is the same – that bank interest rates are less closely tied to the national central bank. Although central banks have been forced to bail out the markets, they are less in control than they seemed to be – in fact the forced pumping of liquidity into the market is itself a loss of control.

Australia did not have the same issue as New Zealand in the housing boom, probably because it is that much larger. But New Zealand could be a sign of things to come. The point is not obvious now, because it just so happens that the private banks’ de facto policy tightening is moving in the same direction the central bank wants to go. The private tightening may in fact take the place of a public tightening. But there is no particular reason why the effect will always go the way the central bank wants.

Most of the story above about securitisation is in the past tense, because the crunch has stopped it almost dead for now. But chances are, once this all blows over – even if that’s on the other side of a major recession – securitisation will be back to stay, and continue to grow. Plenty of once-novel instruments – like commercial paper – have been implicated in financial crises and then come back as part of the wallpaper. Central banks being forced to intervene to stop a meltdown in fact reassures the markets in the long run that such instruments, and the institutions that issue or hold them, will not be allowed to fail. New markets make themselves indispensable.

Mixed market signals

So the other week I arrived home one evening to find a massive garage sale in the park across the road. All kinds of things, beds, sofas, kitchen appliances, and a family standing around dejectedly, looking like they weren’t getting much business. I started sauntering over to take a look, when Raych stopped me. “That’s not a garage sale, you idiot,” she explained. “They got evicted.”

Oh. So this rental crisis thing is starting to bite.

On the other hand, when their place got listed, it was for $200 per week, for a two-bedroom terrace. That’s really cheap. Then when our neighbours gave notice around the same time, their place was listed for quite a bit more, $350 or so. But the agent couldn’t rent it, and it was listed again with a lower price. Next week, same thing happened. As of this week we still have no neighbours.

I have to admit that my street is unusual in that it’s in a part of Sydney with a bad reputation – Redfern, on the edge of the Block. But it’s five minutes from Sydney Uni, and just around the corner from Darlington and Chippendale, about which we are hearing all these stories of the throngs turning up for apartment viewings. So I woudn’t have thought it was completely immune to this rental market tightness.

Anyway, yesterday the NSW Department of Housing released its quarterly rental stats for the March quarter, so I thought I’d compare anecdotal evidence with the hard stuff. They’re based on bond lodgements, so I think they only track new tenancy agreements, but that should still give a good indicator of what is happening.

Overall, rents in Sydney have definitely been rising quite fast. 6.7% rise in the median rent across Sydney in the year to March. And worryingly, the March quarter itself saw a rise of 3.2%, an acceleration. But the rise is concentrated in the Middle and Outer rings, i.e. from Burwood and Canterbury west, from Willoughby north, and south of Botany Bay. In the Inner Ring (which covers a lot of ground), the median rent grew 1.3% in the quarter to March. Which isn’t that small on an annual basis, but isn’t that big either, and is a slow-down from the rest of the year.

Things are even more mixed once you look closer at the Inner Ring. Here the stats are broken down into dwelling type and unfortunately not aggregated. There are big differences between what is happening to one-bedroom apartments and four-room houses, as well as between different suburbs. (So, for example, four-bedroom rents in wealthy Mosman have skyrocketed by 40.7% over the year to March, while in Ashfield they have fallen 5.3%.)

I’m in the Sydney local government area. But those stats could be a little misleading because it includes all kinds of areas – the heart of the city, Surry Hills and Kings Cross as well as Redfern, Alexandria, etc. Overall the median rent for two-bedroom dwellings has risen 10.3% in the year, and 4.3% in the quarter to March – an acceleration. But the median rent on four-bedroom places, where a lot of students will live, has fallen by 2.5% in the year, and by 4.8% in the quarter, which implies a reverse.

In neighbouring Marrickville, median rents have completely stabilised for one-bedroom units, the rise has decelerated for two-bedroom dwellings (1.6% in the quarter, 10.3% in the year), and rents are rapidly falling on four-bedroom dwellings (4% in the quarter to March). Only for three-bedroom houses is the rental squeeze still going on.

You can even zoom in further and check it out postcode by postcode. Sure enough, in my postcode, the median rent on two-bedroom places has gone into reverse big-time, falling 5.8% in the quarter!

As for what this all means, I’ll leave that for another post. But at an individual level the moral is clear – if your landlord is encouraged by all this talk about a rental squeeze and tries to jack up your rent, check the stats and you might find out your bargaining position is better than you thought.

Published in: on 15 May, 2007 at 10:41 am  Comments (2)