Housing
The government has bound itself in accounting stupidity
The government’s Housing Australia Future Fund is blocked in the Senate by the Coalition and the Greens running on a unity ticket. The Coalition’s objection makes no sense – other than their political enjoyment of seeing the government struggling to get legislation through Parliament. By contrast the objections raised by the Greens and by David Pocock make sense: the government’s proposal is just too stingy.
One may wonder why, in view of the nation’s acute housing shortage, the government is reluctant to invest more in public housing. It would be a solid, secure investment, with assured and ongoing returns. It would at least hold its value on the public balance sheet. So why has the government chosen the strange mechanism of investing $10 billion in a “Housing Australia Future Fund”, and spending only the earnings from that fund to provide public housing? Compared with direct investment it makes no sense. Imagine that your house needs urgent repairs, and you set aside $10 000 for the purpose, but instead of spending it you invest it in the stock market and finance the repairs over many years from the trickle of dividends. Weird.
For enlightenment one might turn to Budget Statement 1, Appendix B: Assets and Liabilities, which, by its description, is the sort of place one would expect to find meaningful balance sheet figures. But this $10 billion investment gets no mention in the table of Future Fund investments. The Housing Australia Future Fund gets only a brief mention in the text, which states that once established it will be managed by the Future Fund Board.
There lies the clue. It is to be off-budget, treated as an asset exactly balanced by associated liabilities. If it were invested as a $10 billion asset to be spent immediately on housing, it would convert the government’s precious $4 billion cash surplus into a $6 billion deficit. Setting it up in the future fund mechanism avoids this embarrassment. So long as it does not draw down the $10 billion capital, it will not affect the headline cash balance.
It’s about the cosmetics of public accounting.
One may reasonably blame the government for using an unorthodox accounting system, but the real blame goes back much further – to the Coalition and the Murdoch media for having elevated the cash deficit or surplus to political salience, and to the journalists in other media who present the budget cash outcome as the only thing that counts in economic management.
Peter Martin, writing in The Conversation, explains the stupidity of these future funds, vehicles designed by the Coalition to fudge budget figures, and now used by the Labor government. “The (political) genius of these sorts of funds is they make it look as if you are spending a lot, without the need to spend much at all”. In his article he suggests four ways to provide more housing – two short-term ways to help renters, two to increase supply.
Martin’s proposals fit within the current political restraints on borrowing. But if we are not to face a recurrence of such standoffs over public investment we need to demolish the political assumption that the cash outcome is the be-all-and-end-all of economic management. We need a better public understanding of the basics of public accounting.
There is an economically conventional argument that over the medium term – the course of the business cycle – recurrent expenditure should be matched by taxation revenue. But provided resources are available there should be no such constraint on public capital expenditure. Unfortunately, the way our accounts are presented in our federation, if the government were to spend $10 billion or more on public housing, it would probably have to be as a grant to state governments because the Commonwealth does not want to run a housing program. If it handed money to the states for housing, however, it would show up as recurrent expenditure on the Commonwealth’s books, adding to both the cash and accrual deficits, while strengthening state governments’ balance sheets.
We need a better system of public accounts that consolidates Commonwealth, state and local government investments so that we are not distracted by these silly concerns with budgetary impression management.
Accounting should support economically-sensible policies, not thwart them. Accounting reform would take some time to develop. In the short term journalists who express opinions on budgets should go back to university to familiarise themselves in basic economics and public finance.
The Business Council of Australia – we need more housing
The BCA’s report – Housing Australia’s talent: addressing the nation’s housing challenge – makes the simple but strong point: we aren’t building enough houses to keep up with demand.
Dwelling completions – particularly apartments – are falling, and dwelling approvals are falling even faster. Rental vacancy, having been at about two to three percent before the pandemic, is down to one percent.
Contrary to some claims, immigration isn’t the culprit, but there will be a catch-up for the next couple of years following the pandemic. A decline in average household size, however, has been a contributing factor.
The BCA has a number of recommendations, many to do with easing planning restrictions imposed by state and local governments that impede densification. If we build more housing we will need more transport infrastructure: infrastructure planning should integrate with immigration and housing planning. (Governments often see infrastructure spending only in terms of counter-cyclical stabilization, however, which means there can be long lags in provision.) Also directed at state and local governments is the BCA’s recommendation to remove stamp duty and replace it with land tax.
Build-to-rent housing
The Business Council of Australia is enthusiastic about build-to-rent housing. On last week’s Saturday ExtraGeraldine Doogue interviewed Michael Fotheringham of the Australian Housing and Urban Research Institute and Dan McLennan, of the firm Local, a development company that is one of the few involved in build-to-rent: “Build-to-rent” to combat the housing shortage.
They were enthusiastic about changes in tax provisions, which, until now, had penalized investment in build-to-rent housing, in comparison with other commercial building projects. Those relaxed tax regulations apply to projects with 50 or more dwellings, which should be made available for rent for three years or more, providing security for renters.
They explained that build-to-rent has had a slow start in Australia compared with other countries, but it should ramp up quickly. It is aimed at the middle of the market, but projects often include a certain proportion of affordable housing, sometimes as a government requirement.
Build-to-rent housing offers investors a modest but assured return. Residential rental income is less volatile than rent from commercial property, which means the cost of capital for build-to-rent housing is low. (Australian investors, conditioned to quick returns over a century or more, may have to get used to a world of more modest returns.) The other beneficiaries are tenants who are treated with dignity as customers in a commercial transaction, rather than being treated like some inferior form of life by bullying and patronising staff in real estate agencies. If the worst of these agencies are forced out of business because renters find they can be treated with respect in the build-to-rent market, that’s another benefit.
A lemons law for housing
Have you ever tried to sell a good quality used car? You might have an overseas posting, or have found you have a car that’s surplus to requirements.
It’s difficult for sellers to convince potential buyers that the cars they are selling are as reliable as they claim. Because of this difficulty the market for used cars tends to fall to the bottom, a situation described and analyzed in economic terms in George Akerlof’s 1970 contribution The market for lemons: quality uncertainty and the market mechanism [1].
In recognition of the “lemons” problem there have been certain regulations in the used-car market, to the benefit of buyers and ethical sellers. But in housing, particularly rental housing, it is very difficult for the seller or lessor to convince the customer of the house’s quality, particularly its energy efficiency. That’s why a group of three academics from RMIT, writing in The Conversation, argue that we need a ‘lemon law’ to make all the homes we buy and rent more energy-efficient. There are such provisions in other countries and in the ACT.
1. Why, after 53 years, have the academic journal publishers been able to keep this publicly-funded research behind a paywall? ↩