QUARTERLY ESSAY 92 The Great Divide



Saul Eslake

Just over ten years ago, I gave a talk to a dinner organised by the Henry George League (a small but enthusiastic group dedicated to the ideas promulgated by Henry George, a nineteenth-century economist and journalist best remembered today for his advocacy of a “single tax” on the unimproved value of land), which three months later formed the basis for a submission I provided to a Senate committee enquiry into affordable housing. Both were titled “Australian Housing Policy: Fifty Years of Failure.” If I were to give the same talk again – or write a similar submission to yet another parliamentary inquiry – the only things I would change would be to update the numbers I quoted in it and change the title from “Fifty Years of Failure” to “Sixty Years of Failure.” Because that’s what the policies of governments of all political persuasions, at all three levels – federal, state or territory, and local – have been. An unmitigated failure.

Alan Kohler was kind enough to quote from that talk in his Quarterly Essay. Indeed, Kohler went much further back into history than I did – to the mid-1820s. After reading his essay, I could almost speak of Australian housing policy as entailing 200 years of failure – except for the three decades or so after World War II when, as Kohler documented, Australian housing policy did succeed in meeting its stated goals of increasing home ownership and providing an adequate stock of affordable rental housing for those unable to attain home ownership.

To my way of thinking, one of the valuable contributions which Kohler’s essay makes to the contemporary debate about Australia’s housing crisis is in drawing out the history which shows that governments can – if they make the “right” policy choices – ensure that people can afford to buy or rent a home, even when faced with more rapid growth in the population (and hence in the “underlying” demand for housing) than we have experienced over the past eighteen months.

That is what they did between the end of World War II and the mid-1960s, when Australia’s population grew at an average annual rate of 2.2 per cent per annum (compared with 1.6 per cent per annum over the past twenty years), and the population of Australia’s eight capital cities grew at an average annual rate of 3.4 per cent per annum (because, in addition to the postwar “baby boom” and the massive immigration program, Australians were also moving from rural areas to state capitals in large numbers). Yet despite that, the average price of housing remained unchanged, as a multiple of average earnings, at about 3.5 times: and the home ownership rate rose by 20 percentage points – from 52.5 per cent to 72.5 per cent – between the 1947 and 1966 censuses.

That was possible because governments of both political persuasions, at both the federal and state levels, as well as local governments, focused on expanding the supply of housing and, beyond the bipartisan support for a big immigration program, refrained from adding to the demand for housing. Yes, as Kohler points out, there were ideological differences between the two major parties as to whether public housing should be sold to prospective buyers. But there was a bipartisan commitment to ensuring that the supply of housing matched the demand for it.

As Kohler goes on to show, that commitment began to waver, beginning with the introduction of the first program of cash grants to would-be first home buyers by the Menzies government in 1964. I don’t think it’s a coincidence that the home ownership rate peaked at the first census after that and has been declining ever since. At the federal and state levels, governments of both political persuasions have increasingly favoured policies which have the effect of inflating the demand for housing; while at the state and local level, governments have increasingly favoured policies which have the effect of adding to the cost or the difficulty (or both) of increasing the supply of housing.

In my view, history amply demonstrates that anything which allows Australians to pay more for housing than they otherwise would – be it cash grants to first-time buyers, stamp duty concessions for first-time buyers, preferential tax treatment for residential property investors, government guarantees for loans to people who have difficulty accumulating the required deposit, shared equity schemes, lower interest rates, or easier standards for determining loan eligibility – results in Australians paying more for housing, and hence higher housing prices, rather than in higher home ownership rates.

Yet, despite the accumulation of six decades’ worth of history amply demonstrating that point, governments of all political persuasions keep doing the same things – and, echoing Albert Einstein’s definition of insanity – expecting a different result.
Another of Kohler’s valuable contributions is to point out why. As he says, “housing is a cartel of the majority, with the banks and the developers helping them maintain high house prices with the political class actively supporting them. Everybody involved in this game – homeowners, banks, developers and state and federal politicians – wants house prices to rise for their own reasons.”

I’d put the same point slightly differently. Over the past thirty years, there have been, on average, about 112,000 first home buyers in any given year. Up until the moment they sign their purchase contracts and draw down their mortgages, they (presumably) want governments to do things that would restrain the rate of increase in property prices. But at any point in time, there are more than 6.2 million households – which probably means at least 10 million individuals (out of 17.7 million on the electoral roll) – who own (individually or with a spouse or partner) the dwelling in which they live – all of whom have a vested interest in governments doing things that boost the rate of increase in property prices.

One thing that successful politicians can do is to count votes. And they know that there are far more votes to be had from people who want property prices to keep going up than there are from people who want them to stop going up, or even to go down. And that, I’ve come to believe, is the real reason why what Kohler calls “Australia’s housing mess” will probably never be cleaned up by government policies: because a majority of voters don’t want it to be cleaned up. And politicians know that.

Saul Eslake

Saul Eslake is an economist, speaker and Vice Chancellor’s Fellow at the University of Tasmania. He is a member of the panel of expert advisers to Australia’s Parlia- mentary Budget Office.


This correspondence discusses Quarterly Essay 92, The Great Divide. To read the full essay, subscribe or buy the book.

This correspondence featured in Quarterly Essay 93, Bad Cop.


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