Mentions John Howard

All these things have increased housing demand, as have the grab bag of government subsidies for homebuyers: first home owner grants, stamp duty concessions, mortgage deposit guarantee schemes and shared equity schemes.

Saul Eslake sardonically calls them “builders’ and land developers’ profit margin expansion grants”, and notes that once again John Howard’s fingerprints are on them.

“Almost 60 years of history – since Menzies introduced the first home owners’ grant scheme at the instigation of the Young Liberals’ then president, John Howard – shows that anything that allows Australians to pay more for housing than they otherwise would have has resulted in more expensive housing, not in more people owning houses.

“Suppose a first homebuyer can afford to spend $500,000. And then the state government comes along and says, ‘Well, you won’t have to pay $50,000 on stamp duty’, then the homebuyer thinks, ‘Well, okay, I can now afford to spend $550,000.’ Probably buying the same house, because there’ll be someone else with the same stamp duty exemption competing for it.”

Australia is in the grip of a “bankocracy”, in which four banks control our access to money. Their profits, and therefore the salaries of their executives, depend on both the volume and the value of their assets growing.

The volume of their assets (that is, the number of loans) increases because Australians believe the only way to increase their wealth is to borrow 80 per cent to 100 per cent of the value of one or more houses. And the value grows because the banks’ customers compete with each other to buy the houses and push up their prices and therefore the size of their loans.

The more house prices rise, the greater the banks’ profits. As US investment guru Charlie Munger says: “Show me the incentive and I’ll show you the outcome.”

The way real estate works in Australia is that the federal government and banks encourage demand for it while state and local governments restrict the supply of it.