May 14, 2013

Horse 1482 - Rental Prices and The Australian's and The Daily Telegraph's Editorial

NOT that treasurer Wayne Swan really needs any extra complexities for this year's federal Budget, to be handed down tomorrow, but here is something additional for him to consider. Sydney's cost of living, traditionally higher than in any other Australian capital city, now runs at anywhere from $2100 to almost $5000 a year more than any other capital city.

The financial pressure this places on Sydney is obvious, from real estate and rental markets throughout the rest of our state's economic structure. And, although Sydney wages are higher than in those other capitals, those wages don't cover the cost of living gap.

The challenge for Swan, or for any future treasurer, is to properly address Sydney's growing cost of living during a time of limited state and federal funding. One potential answer is to look for more creative funding methods, with an increased percentage of private investment.
Another answer comes from the opposite end of the economic map, and will prove an even tougher challenge. Further and deeper tax reductions are an essential part of Sydney's financial future.

The present Labor government has introduced a range of expenses, specifically the carbon tax, that seem almost designed to impact especially on western Sydney. It is little wonder that western Sydney now shapes as such a crucial battleground in September's looming election.
We await the Treasurer's answer to these challenges.
- From The Australian and The Daily Telegraph, 13th Mar 2013
Full link here:

I don't know who exactly writes the editorials at The Daily Telegraph and The Australian but whoever they are, they appear to have the economics understanding of a potato.
It is of course very simple for the newspaper to write lots of words about what the government should and shouldn't do but here they'be managed to play the double whammy of arguing down both sides of the road at the same time.

I concur with the Tele when it suggests that wages and rents are higher than the rest of the country. Arguably wages are higher because one of the cost drivers of people's wages, is the fact that they need enough money to afford expenses... like rent.
The cost of rent being so high relative to wages though, is either an expression of one of two things. Either that real wages for most people aren't high enough (which might be true considering that they've been falling since 1979) or that there is an undersupply of property to be able to rent.

"One potential answer is to look for more creative funding methods"... such as what? Funding anything requires investment spending and to be honest, the capital gains system and the ability to negative gear already subsidises the property market. What does the Tele have in mind?
Funding things itself either requires one to draw down on existing savings and/or to borrow the money from somewhere. Money like any other tradeable commodity is also subject to the rigours of supply and demand. Move in and borrow large amounts of money and the price of that borrowing (ie interest) invariably rises. I don't quite get what they mean by a creative funding method, either you have it and spend money, or you borrow it to spend it. Even just "printing" money isn't really creating new money to be spent, for all it does is change the value of a fiat value.

"With an increased percentage of private investment"
I fail to understand this too. Australia relative to other countries already has an exceptionally small public housing sector. Most public housing estates have long been sold off by previous governments to balance budgets.
At a Federal level, The Department of Public Works became the Department of Housing in 1973 and Construction and in various guises was smooshed into other government departments until finally during the Second Keating Ministry it became the Department for Housing and Regional Development. At the federal election in March 1996, no department at all at Federal level was responsible for public housing. Simple mathematics says that you can not increase a percentage of something beyond 100%. There can be no increase as a percentage percentage in private investment of housing (at least as far as the Federal Government is concerned) if the level of private investment is nil.

Private investment is not, I repeat is not, going to step in and provide housing where there are no profits to be made. Mostly the shortage for housing occurs at the bottom end of the market where people on already depressed wages compete against each other for limited houses. A structural shortage has already pushed the demand curve for housing to the right which pushes up the equilibrium price. It is actually in landlords' interests for there to be a shortage precisely because it pushes rents higher and thus, returns on their investment higher.

"Further and deeper tax reductions are an essential part of Sydney's financial future."
Tax cuts might place a small amount of money back into peoples' hands but it doesn't really address the basic problem in this article of the cost of living. Taxation, both at an individual level is paid out of incomes and corporately, post profits. Unless the Tele is arguing for higher wages (which suspect they aren't given their stance on most IR legislation), then I don't see how tax cuts really do much in addressing the issue of high cost of living due to rents.

I run back to this line in the editorial:
"The challenge for Swan, or for any future treasurer, is to properly address Sydney's growing cost of living during a time of limited state and federal funding."
Presumably before 1996 when there actually was a degree of public housing ownership at a Federal level, you can bet that then Telegraph Mirror would have been calling for a reduction of "waste" whilst the Australian would have been calling for "free markets". They can't very well complain when the higher cost of housing is a direct result of the markets which they were calling for.
Forgive my obvious stupidity but if you really wanted to cause a shift downwards in the cost of housing (or indeed any good or service) you can either create a shortfall in demand (thought this may involve a mass extermination program) or you can expand supply. Since the private sector clearly has a vested self-interest then they only real option would be for the public sector to build public housing instead. That would of course mean that we're back to where we where two decades ago and to be fair, that's just too hard for the Federal Government, The Daily Telegraph and The Australian. It's just easier all round if they continue to write nonsense and ignore basic economics.


Anonymous said...

if all rental income was tax-free then u would see mor rental properties

all taxation is theft

Cameron, Woolahra said...

Public housing is socialist and left wing. Public housing is a nazi policy.

Anonymous said...

pinko lefty