The Impotence of Public Policy to Solve Problems... like the housing crisis

In part two I look at what I look at why no policy would ever decrease house prices

Introduction

Last week I wrote about how policy does nothing to aid fertility, this week I look at the housing crises and why the favourite solutions - both left and right - won’t solve the problem. The best descriptor of what is wrong with the housing market in Australia was Emilie Dyes’ that put it down to the fact that we think about property as investment not a consumption good. That is the shift from which all issues with the housing market stem.

It is not just a cultural shift that says “buy property, it is a good investment” much of the intervention on the side of government is to weigh the scales so the older generations that are heavily invested in the property market are protected from the vicissitudes of their chosen investment. Where as non-real property investments, typically where young generations put their wealth in lieu of being able to get into the housing market, are not treated as favourably to government policy.

Look at something as simple as the government currently doing everything to keep interest rates down. This is clearly an intervention in favour of people with mortgages against people with savings (mostly for future mortgages). As of the day of writing this the average interest rate on amounts borrowed for a home loan was about 7% where as the better interest rate for savings accounts was about 5%. That 2% difference is how banks make their money, so not surprising that it is less, but every attempt to keep money as cheap as possible to borrow means that people saving are at a disadvantage, and that is before you consider that they also get taxed on their savings account whereas those with their money locked in a house remain tax-free until they sell it.

The psychological and political story that says that property is as a store of wealth not a productive resource, is an extremely modern idea and that has long ranging consequences.

The attempt of both left and right to charaterise the problem simple and therefore intervene on the side of the market which they blame for the problem, whether that be libertarians that say “it is all a supply issue and all we need to do is to build more” or social democrats that say “we just need to introduce rent controls”, miss the root cause of this problem. Neither left or right proposed solutions will do much so long as people treat property like Krugerrands.

Build More Houses (the favourite policy of the Libertarian Right)

It is the one area which I have a serious disagreement with the libertarians on. Who like to think of the housing crises as a simple supply issue. There is no supply issue. A friend of mine just moved into his bought-off-the-plan new apartment. This is a new block of apartments that is suspiciously empty, yet there is nothing for sale or rent. Likewise a friend of mine that that is currently working on one of most iconic residential apartments blocks in Sydney told me that it is almost 100% owed by foreign investors and that at the moment only 40% of the apartments actually have someone living in it.

Why? because we treat property like gold. It is there to store wealth. And it is not just Australians that do this, although we are probably the worst. The fact that the property market is geared to store wealth means that it attracts foreign investors that need to a safe place to put their money (you can read between the lines with that last sentence lest the CCP come after me).

The problem with this is that the buildings are being built but are all designed with investors in mind, so they don’t solve the supply issue for Australian families that want in to the property market, not for investment purposes but to actually have a place to live (I have already written about the disproportionate amount of one bedroom apartments being built and sold). They also don’t solve the rental market for the same reason. If the purchase was for the purpose of storing wealth (and as a bonus it will appreciate without ever having to make it productive), why go through the headache of having tenants?

There are plenty of new developments, it is just that they aren’t built to live in. They are built to supply the copious amounts of investors, not those that want a home.

Build Better Houses (the favourite policy of the Labour Left)

So much regulation has sprung up in recent years in all states around Australia to combat issues in the building industry after so many high profile problems with new build apartments. Firstly, all of these new laws and bodies to regulate the building industry have in them the assumption that lots of new buildings are going to keep going up, so really they are no different from the “build more” libertarian right, they just want to make sure that public servants are getting in on the grift by making sure that many licenses and approvals and other boxes need to be ticket in the process.

All of these new laws create more and more tick boxes for more and more bureaucrats, and still there is issues because the map is not the territory and a building that ticks all the boxes is not necessarily a good building (and there are plenty of ways that buildings that don’t meet the standards are could actually be quality constructions).

It also doesn’t fix the main issue, that buildings are built and sold no matter how bad they are due to so much demand from investors. This creates bad incentives as the people buying are not necessarily wanting to live in them so architectural things we all agree make buildings nice to live are simply not on the radar. There is a reason old buildings, like the Victorian building I live in with its high ceilings and separate spaces, are far more desirable than modern buildings.

So long as buildings are built for supply to the investment market, they will leave the residents wanting. You just have to look at the price and quality differential between buildings for retirement purposes and those on the general property market. They tend to be significantly cheaper (because they are not investments, most retirement villages require that you sell out at the same price you buy in) and they come with more bedrooms (or just rooms) than other buildings around the same area that are way more expensive. In short they are designed entirely to be lived in, not invested in.

Rental Laws (the favourite policies of the Green Left)

This is where I show my true-horse-shoe-colours, because of the proposed solutions the Green Left actually does the best job of responding to the actual problem - that housing is expensive because has basically become gold.

The first solution proposed by the Green Left, that there needs to be rent controls, is stupid. The reason being is that investors are already loathed to actually rent out the property they own, you add more headache for less rent by tightening the laws around renting and more people will simply not bother to rent out their properties. I have heard stories anecdotally of people who own properties in Melbourne pulling their places from the rental market because the benefit of tenanting their property was outweighed by the cost following the Andrew’s government’s renting reforms.

But their second solution, forcing investors that leave their property vacant to actually make use of it or rent it out, is not so stupid.

My libertarian friends are yelling at me right now, but hear me out. From John Lock to Murray Rothbard there is an inherent presumption that property is supposed to be productive. The common law even has an inbuilt mechanism for giving the person who makes use of the property a better claim over the person that has the title deed but leaves it vacant: adverse possession. It is “property as investment” that is an abrogation that requires so much intervention to keep it up. This simply is a intervention that rebalances property from asset to good to be used and made productive.

I get that doing it by force is of less than ideal, but it would do more than basically any other policy currently on in the “Overton Widow” of public discourse at the moment to make housing more available. This is because it recognises that the people complaining about property prices are wanting shelter not an investment and so long as policy tries to treat them as “future investors” not future home owners for the homes sake” then it will inevitably fail. It also recognises the inherent tension between these understanding of the property market which I will explore in the next section.

Why do all Public Policy Attempts to Fix the property Market Fail?

Only after I had already started this piece did I stumble on the a book review that came to the exact same conclusion that I did. That there is an inherent tension between “Housing as Investment” and “Housing as Shelter”. The reason why no public policy will even address housing prices is that there are too many that are deeply invested (is both senses of the word) in keeping them high and increasing.

To pull the list used in the article referred to above (created for US but just as applicable to Australia):

The constituencies who benefit from high and rising housing prices are many and powerful: local governments that use the property tax for revenue, banks and insurance companies that hold mortgage-backed securities as part of their required reserves, developers and contractors who get bailed out of bad projects by a rising real estate market, pension funds and conservative investors who maintain large stakes in the housing market, and, of course, existing homeowners whose equity increases as prices rise. A general fall in housing prices would be painful or even catastrophic for these entities.

How to Fix the Broken Housing Market by Jason Jewell

We can’t just blame the boomers for this web of vested interests that has made it impossible to create any meaningful change that would weight the scales more towards the market for “Housing as Shelter”.

The infrastructure referred to above was created in the immediate aftermath of WWII and enabled - or entrapped depending how you look at it - the boomers in the property market. Since then we have needed a never ending increase in property prices to keep all these too-big-to-fail entities afloat. Big Banks that are the only types of financial institution that can loan money at the scale we need to have an inflated property market (which also makes it difficult to have serious competition). Big Insurance that is required once you have an asset that has literally all your wealth locked into it. Big Super (and particularly big “ethical” superfunds that refuse to put money in “dirty” in mining and commodities) all of which have heavily invested in the property market (I am writing this from a building owed by ISPT). Big Developers and Big Labour that have a never ending supply of work. Big State Government that profit from increasing sums of Stamp Duty to line its’ pockets. Only after all these Big institutions can you blame the boomers for going along with the “Property as Investment” narrative and putting everything they have into the property market safe in the knowledge that no Government would ever let such a behemoth fail.

There is plenty that government could do to put some more weight of the side of the property market the wants “property as shelter”. Including forcing property owners to make the property they own productive by renting it out, limiting the pool of investors by making it difficult for foreign investors to buy into the Australian property market, or even just not continuously propping up the “property as investment” side, such as by actually letting interest rates rise. But they aren’t because anything they do to help people obtain property as shelter will be a detrimental to every “too-big-to-fail” institution in the above list. Property prices will never fall because we will never let them, it would be too traumatic for too many.

How to Fix it?