Monday, April 16, 2012

Housing: the courageous decisions

There were calls recently by the Real Estate Institute of New South Wales to allow first home buyers in that state to pay off the stamp duty on their first home as a sort of long term loan.  Well intentioned as it might be, it’s a fiscal case of what not to do – all NSW would achieve would be a further entrenchment of a burdensome tax system which is over reliant on property. In Queensland, the new Government will similarly be subject to multiple pleas from lobby groups with respect to property taxes. What it would like to do, and what it can afford to do, may be very different things.
Here are some inescapable realities about property taxes in Queensland that the new government must be weighing as they conduct an audit of state finances and look to their first budget in September. First, reliance on stamp duties and land taxes and other forms of taxation on property have been increasing in Queensland for a decade or more. They now constitute roughly one third of all state government taxation revenue.
Second, the over reliance on property taxation has killed off the arbitrage value that Queensland once held over some other states, whereby our cost of living (especially housing) was so much lower that it acted as a magnet for people and their capital. The cost of new, low cost housing in particular has been hammered by a punitive regime of land taxes, stamp duties, development levies and other charges, plus the GST (which was supposed to reduce state reliance on property taxes like stamp duty).
According to a recent and very good report from the Housing Industry Association, taxes fees and charges now account for 36% of the cost of a new house in Brisbane, and 34% of the cost of a new apartment.  These are big numbers, and have only grown this big in relatively recent times.
The result? Two things have happened, both which have serious and adverse consequences for the state’s finances.
Interstate migration has collapsed to record lows. The former engine room of growth which once contributed each week some 1000 to 1500 people, mainly of working age (I recall that the average age of an interstate migrant was 34?) has withered under the tax burden to its lowest level since the early 1980s! There are now just over 100 net per week arriving to ‘the Smart State’.  Nothing very smart about that result.
Net interstate migration, Queensland –1982 – 2011 

Plus, and partly due to the collapse in migration, housing market turnover has also collapsed. Stamp duties are a turnover tax, and housing transfers and mortgages lodged have fallen to their lowest levels in more than a decade.

That would have meant less money for the government, but what they’ve done to now is to compensate for falling activity-based revenues by increasing the rates and extent of taxes on property.  So they’ve reached the point of having increased their reliance on property taxes to over one dollar in three of revenue, and achieved this on lower turnovers and in a subdued market. 
(For a good general yarn on the demise of Queensland’s low tax status, The Institute of Public Affairs has a good paper titled “Queensland the low tax state: The birth and death of an idea, and how to bring it back to life” which you can download here.)
The State’s finances meanwhile have been worsening at a galloping pace, as expenditures outstripped incomes. For an insight into how serious the predicament now is, the NSW Government’s Lambert Report (their equivalent of the report for Queensland now being undertaken by the Hon Peter Costello and supported by Dr Doug McTaggart and Professor Sandra Harding) looked in part at rating agency assessments of net state debt ratios.  Queensland’s performance has, since as recently as 2006-07, quickly gone from best to worst:
So the ugly reality confronting Tim Nicholls as LNP Treasurer and Premier Newman will be that debt has to be reduced but the capacity to quickly reduce property taxes – which account for a third of state tax revenues – is hampered because cutting these taxes could just exacerbate the problem. You might argue that the industry needs a stimulus, and tax reduction is a must in due course, but timing wise, the capacity to further reduce property taxes now isn’t terribly encouraging. (The Newman Government has already committed to reversing the stamp duty imposition on owner occupied homes, introduced under the Bligh Government in the last budget).
In the absence of tax cuts, what could they do?
As The Pulse has argued before, cutting red tape costs practically nothing. For example, the land constraints which have pushed up raw land prices are a form of indirect tax in that they have increased the cost of land as a result of a public policy measure. Sure, lower prices for englobo or infill development land might mean a small reduction in land tax revenues, but it’s not a direct correlation. However, significantly lower land costs as a result of policy reform would have the effect of reducing new housing costs. If that in turn stimulates activity, treasury revenues stand to gain – and thereby increase their capacity in future budgets to lower the rates of existing taxes currently charged.
The HIA report also details the high costs of ‘green’ and other building and regulatory compliance costs. These are not taxes but they do add substantially to the cost of new dwellings. In Brisbane, for example, the report notes the cost of meeting new energy efficiency standards in housing at $55.76 per square metre, but the benefits are only $10.10 per square metre. Green star ratings, water tanks and other mandatory measures introduced in recent years may have their place, but do they need to be mandatory if the real challenge is to reduce new housing costs and restore affordability?
The report also deals with the costs of planning uncertainty and excessive delays in development assessment – again, aspects of development which add nothing to state revenues but which add significant costs to new supply. In theory, achieving substantial reform on these fronts would reduce new supply costs at no cost to the budget.
The new LNP Government has already committed itself to cutting red tape by 20% and the early gestures and statements seem to indicate they intend to keep that promise. In doing so, they will encounter swarms of protest from ill informed or vested interests, seeking to protect the very processes that have stifled growth and prosperity without producing any measureable net gain. (This example, which bemoans the LNP’s decision to drop the ‘sustainability declaration’ may be a taste of things to come).
Keeping that commitment will require a steely resolve in the face of environmental, planning and local government protests, let alone the hostility of elements of the bureaucracy within the government itself. In doing so, they might be reminded of the advice once offered by Sir Humphrey of ‘Yes Minister’ to the young Bernard Wooley, on how to ‘guide’ Ministers to make the “right” (as in public service endorsed) decision:
Sir Humphrey: If you want to be really sure that the Minister doesn't accept it, you must say the decision is "courageous".
Bernard: And that's worse than "controversial"?
Sir Humphrey: Oh, yes! "Controversial" only means "this will lose you votes". "Courageous" means "this will lose you the election"!
The new LNP Government in Queensland received an overwhelming mandate in the recent election. That mandate provides them with ample grounds to make courageous decisions on red tape and compliance costs in the property sector, without being intimidated by the bureaucracy or opponents of reform. By the time of the next election, the budget might then be in better shape, along with the rest of the economy, to afford the industry the tax cuts it needs.

Thursday, April 12, 2012

Two Bobs each way

Senators Bob Carr (Labor) and Bob Brown (Greens) have made an each way bet on policies designed to support a bigger Australia all but impossible: the odds are presently unbackable and hostility to growth is now all but official policy. 
Bob Carr, a former NSW State Premier, was earlier this year elevated to fill a casual Senate vacancy at the request of Prime Minister Julia Gillard, and was immediately appointed to Federal Cabinet as Australia’s Foreign Minister. What’s that got to do with population policy and planning for a bigger Australia? Simply, Carr’s views on population are well documented: he famously declared as Premier that ‘Sydney is full’ and put into effect a strict urban growth boundary and other policies designed to contain growth. What followed was rapidly worsening housing affordability, increasing congestion and a period of economic malaise in the NSW economy to such an extent that it was widely viewed as a brake on national GDP.

Not one to let the evidence of damage caused by his policies when Premier interfere with his current views, Carr has continued to campaign on the notion that Australia ‘lacks carrying capacity’ and is too fragile to handle more people. In a blog published late last year, before his elevation to the Senate, he wrote:

I was honoured to give the opening address to a strategy planning workshop of Sustainable Population Australia (SPA) [of which he is a Patron] .. The population debate had turned around after former Prime Minister Rudd’s statement in 2009 that he made no apologies for believing in “a big Australia”. The public reaction forced him to retreat within about two months... Remarkable thing is the strength of a backlash to the big Australia notion. Now the ALP, the Coalition, the Green Party and environmental groups refused to endorse anything like “a big Australia”... I told the group to beware of the ridiculous arguments that “It’s not population, it’s just infrastructure.” As if nobody was interested in building any. Or, “It’s not population, it’s just consumption.” Of course it is both. Or, “It’s not immigration, it’s just planning.” Wrong – fast population build-up stresses even sound urban plans. Population growth is the basis of all environmental pressure.  And I recommended they join the political party of their choice and increase their political activism, leaving them with a message of hope: “You are winning this debate. Population advocates in big business feel isolated. Most Australians agree with us.”

Carr draws a clear connection with population growth and business interests, claiming the only reason for proponents to back further growth in Australia is, by implication, greed. It’s a common theme among those who actively oppose growth.

His arrival in the Senate was due to the support of the Prime Minister, Julia Gillard. Gillard famously disputed the man she deposed as PM – Kevin Rudd – who in 2009 declared he was in favour of a ‘big Australia.’  After Rudd made those comments, it wasn’t long before Gillard countered with her view that Australia should not ”hurtle down the track towards a big population.” 

Gillard, a former Shadow Minister for Population (in 2001) went on to say as Prime Minister (in mid 2011):

"My position on our nation's future sustainability is plain and clear. I do not believe in the idea of a big Australia, an Australia where we push all the policy levers into top gear to drive population growth as high as it can be...  One of the things Australians often say when we've spent a few days in a crowded, congested city in Europe or the United States: it's a nice place to visit, but you wouldn't want to live there... I will not allow Australia to ever become a country of which it is said: it's a nice place to visit, but you wouldn't want to live there.”

Her approach since then has been to resist the idea of promoting or supporting population growth and she will find an enthusiastic cabinet ally in Carr. What Gillard now does with Tony Burke, her ‘Minister for a Sustainable Population’ (formal title: Minister for Sustainability, Environment, Water, Population and Communities), is unclear. Perhaps the use of the word ‘sustainable’ in a Minister’s title is really these days a by-word for ensuring nothing much happens. Sustainable growth, in government speak, means no growth. Ditto for our population? The Minister hasn’t issued a single media release on the topic of population since the start of the year. Maybe it’s best to ignore the topic and it might go away?

There’s another incongruous aspect to Gillard’s comments about crowded and congested European and US cities: these have been the very models held up as poster children of planning policy virtue under State Labor Governments. Densely populated Euro and US cities have been favoured destinations for countless study tours and public policy references. The problems encountered in these cities of excessive housing affordability problems are just not mentioned (Vancouver, often cited as a model of planning ‘reform’ has the most expensive housing in the world and a median house price of $1.5 milllion, along with the massive social dislocation that goes with it). By contrast, study tours to less dense, more affordable and less congested cities just don’t seem to find favour.

And the role of the Carr NSW government in failing to address transport systems while at the same time promoting a high density urban model also seems to fail to rate a mention. Under Carr, Sydney quickly became one of Gillard’s “places you wouldn’t want to live” (unless you’re wealthy) - as the exodus of population and capital proved.

Bob Carr and Julia Gillard have been supported by a third prominent voice who opposed population growth and whose influence on federal policy stretched well beyond the single figure levels of support they gained at the polls: Bob Brown, former leader of The Greens. What’s Bob Brown had to say on population? In 2009, responding to the 3rd Intergenerational Report released by the then government, he said: “This population boom is not economic wisdom, it is a recipe for planetary exhaustion and great human tragedy.”

Planetary exhaustion and human tragedy? This doomsday scenario, Bob would have us believe, is because we might in Australia reach 35 million people by 2050. It’s not a big number by any stretch of imagination. But sufficient for Brown to warn of impending doom. Brown, among other things, is an avowed Malthusian and fan of Paul Ehrlich’s ‘Population Bomb’ published in the late 1960s, as this exchange from ABC’s ‘Q&A’ in 2010 shows:

BOB BROWN:  We're chewing up more than the planet can sustain and we're giving future generations a deficit for having been here. Malthus warned about this 2 or 300 years ago...

JOHN ELLIOTT: And he was totally wrong.

BOB BROWN: Well, he was right.

JOHN ELLIOTT: He said the food - we're going to run out of food in 100 years.

TONY JONES: Hang on, John, you'll get your chance.


JOHN ELLIOTT: He was useless.

BOB BROWN: The Ehrlichs wrote The Population Bomb in the 1970s and they've been laughed at, but the serious matter is that in my lifetime, Tony, there were 2.7 billion people when I was born onto this planet in Oberon, New South Wales. There are now seven billion and we're headed for 11 billion and the planet - we need two or three planets to be able to provide that and we obviously don't have them.

No, we don’t have extra planets Bob, but maybe we once did and they were ruined at the hand of man (and alien) kind? If you think I’m taking this too far, maybe you haven’t read Bob Brown’s Third Annual Green Ovation, delivered only last month (March 2012). Bob Brown opened his speech with the welcome: “Fellow Earthians” - and it just got stranger after that. (Read the whole speech here if you don’t believe me).  

Brown’s thesis was that maybe alien life had existed on other planets but our ‘intergalactic phones’ aren’t ringing because they ‘extincted’ [sic] themselves, much as we humans are doing. Overpopulation and capitalism, in Brown’s mind, go hand in hand, and the solution lies in a global democracy and a global parliament of one vote, one value. Just where that leaves a country like Australia, population 23 million, is unclear.

[You could be forgiven for thinking, when you read this sort of material, that The Greens have a black armband view of human kind full stop. Elements of The Greens might be happier without humans on the planet at all, or if we are to exist, it’s as primitives in caves living the subsistence existence of a noble savage.]

Brown has of course now resigned but his influence will live on. The Greens may begin to fracture but they will continue to hold the balance of power until at least the next election. They’re highly unlikely to be any more amenable to growth than Brown was. More likely, they’ll be even more hostile and shrill in their anti-growth messages.

So the Prime Minister’s views, and those of her influential Foreign Minister, supported by the views of The Greens under Bob Brown (and probably more so post Bob Brown)  have been antagonistic to population growth and hostile to business pleas that growth without people in a country the size of Australia is a problem. The prospect of any public policy change for the better in Canberra is remote.

There are a couple of big questions which rise from this: does this policy view reflect mainstream Australia’s interests, and where does it leave us if growth slows to a stall?

On the question of policy fit with mainstream Australia, some clues might lie in recent state elections in NSW and Queensland. In both, the Labor vote collapsed. Population growth was not an election issue in either, but economic growth and the state of the economic management clearly was. In Queensland, a once strong economy with a strong budget was rendered impotent under low growth and high debt. The construction industry in both states sunk to historic lows, putting pressure on trades and with them, pressure on household budgets. ‘Green’ initiatives added to living costs and served as brakes on economic development. The anti-growth, anti-car, anti ‘sprawl’, anti-expansion and anti-development views that the trendy left of inner cities took as policy gospel were perhaps out of favour in the suburbs where many traditional Labor voters lived.

As Graham Richardson noted after the political slaughter of the ALP in Queensland:

“The intriguing thing about last night is that in the inner-city the swings were 10 and 12 per cent, but you get out into the suburbs – the further you go, the bigger the swing. They are 17 to 20 per cent out there. So there is something seriously wrong in working class voter land. The Labor base no longer votes for it. And Labor is going to have to work out why.”

Is it possible that the suburban heartland Labor once took for granted is more interested in employment prospects and the costs of living than the inner city latte set give them credit for? In tougher economic times, jobs and the cost of putting food on the table and paying for your utility bills and petrol prices are of more concern. Housing affordability is a real issue to people on working wages trying to enter the housing market. To be told they have to ‘give up the dream’ of home ownership and detached housing by a social left policy alliance is not what they want to hear.

On what it means to Australia if no-growth becomes a reality by virtue of do-nothing policy settings, the consequences are pretty straight forward. An ageing population will have to rely on a smaller tax base of working age people, who will be increasingly taxed to live in an economy of higher living costs and higher housing costs, because new supply won’t be stimulated and costs of occupancy, travel and daily living will rise (via initiatives like the carbon tax and other measures). Economic growth will slow, and if the resources ‘boom’ takes a breather (as it surely must), the two speed economy quickly becomes a one speed economy. That speed is currently ‘dead slow.’

Falling prosperity means fewer government services and a falling capacity to pay for personal services. Standards of living will fall. Is this what the electorate have already sensed in the trendy dialogues of policy debate, and what was rejected in the recent polls? Is this why the Green vote fell in the latest Queensland election, and why outer suburban swings to the LNP were more pronounced than in the inner city?

Labor and Green opposition to population growth is opposition to prosperity and living standards for working Australians. We’re not talking here about an Australia of 100 million or more, just the prospect of 35 million by 2050 – and that was based on long term growth rates which we seem to have managed in the past, and still ended up with higher standards of living. If Labor and The Greens want to re-connect with mainstream values, their blind opposition to growth will need to be rethought.