gyro et al will want this guy deported lol

George Megalogenis: Home-blown economy

March 26, 2005
REMEMBER the wog mansion? There was a time not long ago when this form of immigrant housing was ridiculed by popular culture for its excess of phallic pillars and pebble-mix driveways.

Today, the wog mansion has an Anglo imitator, the outer suburban McMansion. The tragedy is that no one seriously questions the tastes of the families who buy them - Kath&Kim notwithstanding - because these aspirational voters decide elections.

It doesn't take much imagination to connect the bottlenecks in the economy with our mania for bricks'n'mortar. What is not widely understood is the difference between this particular boom - and the record balance of payments deficit that comes with it - and all those before it.

The Reserve Bank of Australia belled the cat last December when it studied Australia's foreign debt fetish of the past 25 years. There have been six blow-outs since 1979: one under Malcolm Fraser's Coalition government; three that can be sheeted home to the Hawke-Keating Labor governments; and two with John Howard's name on them.

It is the final pairing (let's call them episodes I and II of the Howard Government) that confirm why this property cycle is like no other.









In both instances, the borrowings from overseas funded an investment surge of about three percentage points of gross domestic product or $24 billion in today's dollar.

Episode I, from 1997 to 1999, followed the script of the past, with three investment dollars in every four being devoted to factories, office blocks and equipment for business. The balance, 24.1 per cent, went into quarter-acre blocks and apartment towers. EpisodeII, which has been running since late 2001, breaks the mould. More than half, 56.7 per cent, of the new investment across the entire economy has been gobbled up by the housing sector.

A government that allows a nation to warp its priorities in this way is asking for trouble. Yet the Prime Minister fobs off the bottlenecks in the economy as the fault of states and the trade union movement. It's nonsense, of course. One of the reasons Australia has run out of tradesmen is that what remained of the blue-collar workforce has been erecting McMansions.

Since 2001, real spending on new and established homes has jumped by 46.1per cent, after removing the effects of prices. That's just the auctions side of the equation. Renovations have also risen by 36.2 per cent. The economy, meanwhile, grew by 11 per cent in the same three-year period. Do the maths: this boom will end in tears.

The RBA has been trying, oh so politely, to tell Howard that his tax system is to blame. The usual suspect is negative gearing. This Government is the first in history to cover the mortgage burden of property investors for three years in a row. In the 2000-01 and 2001-02 tax years, total rental deductions exceeded rental income by $696million and $622 million respectively. The next round of tax statistics, due before the May budget, are expected to confirm the shortfall doubled to about $1.2 billion in 2002-03.

But negative gearing didn't start with the Coalition. What altered the trajectory of demand for housing was the Government's decision to halve the capital gains tax in September 1999.

In the last financial year of the old regime, 1998-99, the Australian Taxation Office was $698 million in the black in its dealings with property investors - the mirror opposite of the position since 2000-01. The tax office has made only an oblique reference to the revenue hole. In its latest compliance report, it said that "capital gains tax is a strong focus for us". The tax office administers the law; it doesn't offer policy advice or investigate social trends. This is a shame because few institutions would have a better feel for the damage that property is doing to the economy at the moment.

One day the tax office will inform the Government that tax collections are drying up and the budget is heading for deficit - real-world clues that the economy has tanked. Just watch the Coalition try to shove responsibility on to the tax office for getting the forecasts wrong, in the same way that it bagged the RBA for lifting interest rates earlier this month.

The so-called Coalition backbench ginger group should be paying attention here. If they are serious about reform, they must think about ending the rort that is the capital gains tax. The gap of 23.5c in the dollar between it and the top personal tax rate of 47c is a more pressing issue for the economy than the oft-quoted wedge between income tax and the 30c company tax rate.

There was a telltale moment earlier this month on the day interest rates rose and the economy sank. Asked to explain the difference between his banana republic and Paul Keating's in 1986, Peter Costello rolled out some seemingly flattering numbers.

"Paul Keating had inflation at 9.3 per cent, today it is at 2.6 per cent," the Treasurer crowed. "Paul Keating had mortgage rates at 13.5 per cent, today it is at 7 per cent." He corrected the latter figure to read 7.3 per cent.

Either way, it's proof that Costello is the low inflation, low interest rate treasurer, right? Yes and no. Subtract inflation from the mortgage rate and what you get is the real interest rate, the measure Howard once loved quoting against the former Labor prime minister. Guess what? Costello's data shows home borrowers face higher real interest rates today than they did under Keating two decades earlier - 4.7 per cent v 4.2 per cent. This is the true cost of the Government's complacency - real interest rates that are higher now than they were two decades ago when the economy was being restructured.

That no wag in the press gallery seemed to pick up the gaffe on the day underlines another contrast between the Howard-Costello and Hawke-Keating eras. The Opposition and the media never took a decimal point for granted when Keating was playing the role of economics tutor to the nation in the 1980s. Each utterance was dissected for weeks, not hours, as is the norm nowadays. Back then, the obsession with economics was often overdone. But it was a genuine public debate.

The past 13 years of affluence has softened the political class. Governments, both federal and state, deploy lazy arguments because they can; their oppositions see no reward in scrutiny, so they resort to the shrill; and the press gallery views its role as second-guessing the next election result.

Today, as the economy stumbles, there is an almost surreal lack of urgency. The Government thinks that more industrial relations reform, a rush-job inquiry into bottlenecks and a jihad against the Labor states is enough to keep the boom rolling along. Of the three responses, two are exercises in spin, while further deregulation of the labour market is unlikely to yield any meaningful dividend until the second part of the decade.

Most of the commentariat continues to cheer Howard on the assumption that come July 1, when the Senate falls into his hands, he will make up for nine years of policy cruising by unleashing a final round of economic rationalism.

But the real trouble with the nation at the moment isn't the greed of workers or the gridlock at our ports, but too much investment in housing. Howard has no stomach for reform on this front.