And government is the answer?

I didn’t bother going to the Richard Snape lecture, sponsored by the Productivity Commission, delivered this week by Nobel-prize winning economist, Joe Stiglitz.

What a choice of speaker.  What was the PC thinking inviting Stiglitz to give this named lecture, in honour of a fine economist who died too young?

Snape was a small government, free trade, economic freedom man and Stiglitz – well, I had better not say what I think.

Anyway, the theme of the lecture – and that is being kind, it was evidently a rambling discourse covering all manner of topics – was that government is the answer and the key to more innovation is government action.  Sure, I thought.

I was reminded of this morning by this piece in The Australian about the Building Better Regional Cities program instituted by the previous government.  Read it and weep. A source of innovation?  More like corrupt pork-barrelling using taxpayers’ monies that are extracted with high deadweight losses.

THE Coalition has slammed a $115 million Labor-era scheme to increase the supply of affordable homes in regional cities as a “pork-barrelling exercise’’, after it emerged just 247 of 8000 promised dwellings had been delivered at more than triple their estimated cost.

It also has been revealed two of five infrastructure projects to receive ministerial approval in May 2012 against departmental advice were in then independent Tony Windsor’s electorate of New England and Dobell, held at the time by former Labor MP Craig Thomson. Both MPs were crucial to propping up the minority Gillard government.

Social Services Minister Kevin Andrews said yesterday the Building Better Regional Cities program was “the essence of incompetence and partisan pork-barrelling’’.

He said former housing minister Brendan O’Connor “cherry-picked programs that fitted in with his political agenda, with complete disregard for the advice of his department, which said that most applications were lacking in merit or did not provide value for money’’.

An opposition spokesman said last night Labor was proud of its record in improving regional housing. (LAUGH EVERYONE HERE) Julia Gillard launched the scheme on the first day of the 2010 election campaign. It was designed to provide infrastructure grants to councils to help support the delivery of up to 8000 homes and reduce housing stress in capital cities.

Grants of up to $15m were approved for 16 projects in 15 cities for the upfront developer costs of infrastructure such as connecting roads, bridges and upgrades to drains to support new housing developments.

In April, a damning Australian National Audit Office report found most applications failed to provide value for money and that just 2969 “affordable homes’’ in regional cities including Wollongong, Ballina, Port Macquarie and Hervey Bay were expected to be delivered when the program was completed in mid-2016, with many projects running behind schedule. It has now been revealed that just 247 dwellings have been delivered.

Department officials said yesterday many projects were still at the first stage of infrastructure development. The April audit report found each subsidised lot or dwelling could end up costing taxpayers about $38,100 in grant funding — more than three times the $12,500 per home originally envisaged. It also said “most of the applications had been assessed by the department to lack sufficient merit and/or as not providing value for money’’.

The program joins the ranks of other flawed Rudd and Gillard government taxpayer-funded rollouts including the $16.2 billion Building the Education Revolution program, the home-insul­ation program and the green-loans scheme. “This program was nothing more than a pork-barrelling exercise as 80 per cent of the non-recommended projects were (in) Labor or Labor-aligned electorates approved by the then minister, Brendan O’Connor,” Mr Andrews said.

“Two of the electorates concerned were New England and Dobell, held by former independent Tony Windsor and (former) Labor MP Craig Thomson.’’

The April audit report found five of the projects to win approval were not recommended by the department because they were assessed as offering “marginal’’ value for money and did not meet at least two of five criteria.

The locations of the five “not recommended but approved’’ projects were identified yesterday in a hearing of parliament’s Joint Committee on Public Accounts and Audit. They were in Tamworth in New England, Lake Macquarie in the Labor electorate of Charlton, Maitland in the Labor electorate of Hunter, Wyong in Dobell, and La Trobe in the Nationals electorate of Gippsland.

The Wyong water and sewer infrastructure project was later withdrawn by the department, and the La Trobe project, which did not meet any of the merit criteria, did not proceed to the funding agreement stage.

Committee chairman Andrew Southcott said two of the projects “were in seats held by members who were essential for the survival of the Gillard government: New England and Dobell’’.

He said the audit office had been “damning in the administration of this program in both their performance audit and in evidence before the public accounts committee”.

“The stated goal was 8000 houses for $100m; it seems we have already spent $109m and only have 247 houses,’’ he said.

An opposition spokesman said: “Labor is proud of our record in improving regional housing, after being ignored by the Howard government, and as expected Tony Abbott’s budget exposed a callous disregard for affordable housing for families doing it tough.”

The BBRC program was one of three schemes Labor undertook to improve the supply of affordable housing along with the National Rental Affordability Scheme and the Housing Affordability Fund.

NRAS has been exploited by universities and developers, which have tapped it for millions of dollars of subsidies to build towers for wealthy foreign students.

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25 Responses to And government is the answer?

  1. Cynic

    “The program joins the ranks of other flawed Rudd and Gillard government taxpayer-funded rollouts”.

    It is a bit harsh to mention names here when you could virtually insert the name of every PM for the last few decades and the sentence would be just as valid. In 2-3 years time we will be using “direct action” instead of “home-insulation” in these conversations.

    The problem is politicians of all colours forcing governments to get involved in areas where there is not a market failure justification for any intervention. And even when there is a market failure, politicians cannot help themselves but to influence intervention design and decisions despite the best efforts of the technocrats.

    Politicians seem to be the only profession (term used loosely) on the planet that don’t recognise the limitations of their skills and knowledge.

    I’m not sure what the solution is, but I’m sure the current system could be improved greatly.

  2. brc

    I’m quite sure the builders in regional cities are quite capable of building perfectly good houses. I’m sure the residents of regional cities are capable of borrowing the money to build such houses.

    Getting an affordable plot of land to place said house upon, and getting permission to build said house….

    I think I have discovered the problem. Australia is a small country with a very dense population. There’s just no space in regional areas to build new houses. That’s why the land there is so expensive!

    /sarc

  3. George Brandis thanks for NOTHING

    Julia Gillard launched the scheme …

    Doomed from the start.

  4. Cynic

    The solution to affordable new housing is pretty simple. If you want to build a cheap house, build a small home with modest finishings. You know, like the one your parent’s built. ABS data indicates that the average size of a new build in Queensland is 40% larger than 25 years ago and has more bathrooms and higher levels of finishings.

    The “crisis” of excessive building costs squeezing people out of the housing market is a complete beat up. Relative scarcity for land, consumer preferences, both assisted by government policies such as tax treatment of investment properties, explain the majority of growth in the cost of new house prices.

  5. johanna

    Re the Productivity Commission – note that the admirable Gary Banks was replaced by a Labor appointee (Harris) who is, shall we say, not even in the same ballpark, just before the election.

    The Minister should be advising Harris that this would be a good time to spend more time with his family. Even if it costs a lot to terminate his contract, the damage that poor advice from the PC could do to the economy runs into the billions.

  6. brc

    he solution to affordable new housing is pretty simple. If you want to build a cheap house, build a small home with modest finishings. You know, like the one your parent’s built. ABS data indicates that the average size of a new build in Queensland is 40% larger than 25 years ago and has more bathrooms and higher levels of finishings.

    The “crisis” of excessive building costs squeezing people out of the housing market is a complete beat up. Relative scarcity for land, consumer preferences, both assisted by government policies such as tax treatment of investment properties, explain the majority of growth in the cost of new house prices.

    Wrong.

    This has been discussed endlessly at this site.

    The proportion of land costs in a newly finished dwelling has increased dramatically. This is exacerbated by excessive taxes on new dwellings as well.

    The increase in the size of houses is a function of increasing productivity in the building sector. The same phenomenon as why an iPhone carries infinitely more features than a Nokia from 15 years ago for the same price, and why a new Falcon is more luxurious than a 1980s Mercedes, despite costing about the same number of hours worked to buy said Falcon back in the 1980s when you got an AM radio and vinyl seats. The same amount of labor buys a lot more stuff. That’s why new houses have more and better stuff- because of the deflation in costs of that stuff.

    Tax treatment for investment properties has a negligible affect. On the balance, it is likely positive as it encourages building of property and lowering of rents. The prices of houses is a function of how many people want to live in a property vs how many properties there are – whether they are renting or buying. The driver of any market is demand and supply. The supply of new land is constricted by planning restrictions – this is obvious to anyone. The demand for new dwellings is increasing due to a lower person/dwelling ratio and population growth.

    In regional Australia you should be able to purchase land and build a dwelling on it for just above the same cost of land per acre that farms are sold for. This is not the case, and the easiest way to get rich in Australia is to have a piece of land converted from farming use to residential use (just ask NSW Labor). Just changing the use on that land generates windfall profits. That is where the problem is.

  7. Judith, back in the day, Joe Stiglitz was a great admirer of the Japanese banking system and how they formed long-term relationships with their big business clients.

    Stiglitz quietly stopped talking about that after these banking relationships turned into zombie banks and zombie firms that were the driving force of the Japanese lost decade.

  8. George Brandis thanks for NOTHING

    The increase in the size of houses is a function of increasing productivity in the building sector.

    Possibly. But I think a more significant driver is the rise in land prices.

    An increase in the price of land encourages owners to apply more capital to that land, in order to generate a return which justifies the purchase price. Hence, we get bigger houses for a given parcel of land.

    Henry Ergas wrote about this in the Oz, either late last year of early this year.

    Of course, it’s also a function of increasing wealth – people wanting to live in bigger houses, and being willing and able to spend the money to do so.

  9. Mr Rusty

    Grants of up to $15m were approved for 16 projects in 15 cities for the upfront developer costs of infrastructure such as connecting roads, bridges and upgrades to drains to support new housing developments.

    Surprise, surprise. All Union dominated industries.
    Every Labor MP from 2007-2013 needs arresting, their assets seized and are only released from jail when they are in a body bag.

  10. brc

    Possibly. But I think a more significant driver is the rise in land prices.

    An increase in the price of land encourages owners to apply more capital to that land, in order to generate a return which justifies the purchase price. Hence, we get bigger houses for a given parcel of land.

    Henry Ergas wrote about this in the Oz, either late last year of early this year.

    Of course, it’s also a function of increasing wealth – people wanting to live in bigger houses, and being willing and able to spend the money to do so.

    I agree with this, but wanted to present one principle at a time. It’s important to do so when talking someone back from the precipice that is the thought that high house prices are because of two-vanity bathrooms and air-conditioning, multiplied by negative gearing for investment purchases. That’s one stop away from ‘darn chinese stole all my houses’.

    The high land prices does tend to increase house size and quality – because the purchase has to be bigger then people naturally want more bang for their buck.

    It doesn’t answer why you need nearly 300k for a 60 year old house in a regional town, though. That is all about restrictions on land releases in said region.

  11. George Brandis thanks for NOTHING

    brc – yep, ok.

    And agreed.

  12. Tim

    BRC, I agree entirely with everything you have said. So – just taking the regional city example – what is the solution? Remove all restriction on where a house can be built? Supposing a clique of libertarians stormed control of a regional council – what would their actions actually be?

  13. .

    Tim

    Are you suggesting some sort of junta when local Councils get reorganised into Joint Organisations and there is mass amalgamations/sackings?

    Let the good times roll. Libertarians in charge of planning and service delivery.

  14. .

    Judith

    If you want to bring up absolute incompetence, try Rudd’s effort to provide housing for Aboriginal communities.

    Several hundred millions dollars later and a handful of functioning, completed homes.

    http://bovination.com/readArticle.php?articleId=1661838

    Two years ago Kevin (‘economic stimulus’) Rudd allocated 672 million dollars to build houses for Aborigines. Now, dear reader, let’s do a quick calculation on how many houses that might build. A friend of mine spent $350,000 building a house recently. Add 50,000 for servicing a block, and that’s probably around $400,000 to build a lovely spacious modern house. So 672 million hard-earned tax dollars should build around 1920 houses, right? In fact if we were willing to do without the double garage with internal access we could easily do over 2000.

    So how does that get allocated? Well, Tenant Creek was allocated $36 Million for 20 houses. That’s 1.8 million dollars per house! But it gets worse. It was then revised down to nine houses. That’s four million dollars per house! Apparently “training costs and fees for consultants” were significant (who’d have thought). But still it gets worse. Now it’s been revised to zero houses. Yes, that’s right – zero houses will be built with the $36 million. The money is going to be spent on fixing up some existing houses.

    In fact no houses at all have been built on the scheme so far. Anywhere. With the whole 672 million dollars. Some houses might be built in 2011. Maybe. And they are talking about a total of 300 houses. That’s 2.2 million dollars per house! If they even build that many.

    Many Australians were overjoyed when Kevin Rudd apologized to the Aborigines. All the child abuse, the drug problems, the health issues were all going to be solved. Because we apologized. Kevin had the solution. Kevin was smart. Kevin could close the gap. Kevin could make everyone happy.
    Except that 672 million of hard-earned tax-payers money and two years has not produced a single house.

  15. brc

    BRC, I agree entirely with everything you have said. So – just taking the regional city example – what is the solution? Remove all restriction on where a house can be built? Supposing a clique of libertarians stormed control of a regional council – what would their actions actually be?

    It could happen. It has happened elsewhere. Someone recently posted about the city in Georgia that privatised everything except police and fire. I expect planning could be similarly done.

    Unfortunately the state government possess the ability to call in developments and stop them happening. And there probably are all sorts of state -level planning restrictions that can’t be overcome at the council level. A friend of mine was working in BCC when planning was approved for some flood prone areas. He personally recommended not to do it, but the law was the law and that was that. So it works both ways – if the law says you can or cannot build something somewhere, eventually one side or the other will enforce it.

    And good luck with getting up on a platform of development these days. You’d end up with a camp of swam pies on your proposed development the moment cheap housing on decent blocks escaped as a concept. And voters these days tend not to vote for it. You’d have to do it somewhere with fixed terms and essentially Oakeshott the public by pretending your were for Koalas and then pulling the rug and saying ‘actually you can build anything, anywhere, as long as it is safe’ once you got into office.

    I honestly don’t know how to walk back from the land restrictions without causing problems. I would say that it needs to be region-led, in that easing land restrictions in regional areas is the first step – this would probably convince some people to decamp their more urban digs and swap, if the price differential was big enough (lets say 2-300 k). Could be retirees, young families, FIFO workers. I’m talking about buying a block of regional land for 10k or less. Pulling a town out of the air – land in Childers for a house block ranges from 60-150k. Why should it be so high? I don’t know what farmland in the area goes for, but I bet it isn’t 100k an acre or even 50k an acre. This would ease pressure on urban areas without pulling the rug. It could be expanded gradually over a period of 10-20 years until it reached the outer areas of major cities. Hopefully you’d have a gradual deflation of prices in comparison to wages but without wide scale depreciation of land values which would spell trouble for the banks.

    The other part to my proscription would be swapping stamp duty for property taxes, with a transitional period so people who already paid stamp duty aren’t double-dipped. Once property tax was an ongoing payment – it would just be a tax on land use and not a tax on moving houses. That would encourage more liquidity in the housing market, and allow people to more easily downsize to other regions and lower their indebtedness.

    More land and more liquidity – that’s my platform.

  16. .

    Liquidity may be a misnomer, but I can’t come up with a better descriptor myself.

  17. Cynic

    brc

    I’m not sure how you make a conceptual leap from a simple statement that a consumer choice to build a bigger house obviously makes it more expensive (an indisputable fact I would have thought) to…. “That’s one stop away from ‘darn chinese stole all my houses’.” I think that says a lot more about how your brain works than mine. Check under your bed when you get home. There might be Red under you bed left over from the 1960s.

    Surely……

    Bigger houses = a consumer choice (irrespective of supply side efficiencies). No need to Government intervention to address the housing affordability crisis.

    Expensive land means people build more expensive houses (Henry Ergas point) = a consumer choice. No need to Government intervention to address the affordability crisis.

    So perhaps the only valid reason why increases in new house costs should be of concern to Government is the land price (driven by the market), and the only real influence governments have on the the market is controlling supply (via planning instruments).

    The costs of headworks (roads, sewerage etc) rarely exceed $30K per suburban block, so that isn’t explaining the high cost of land.

    Most local governments have ensured sufficient land is zoned to meet the demands from population growth. For example, in South East Queensland local governments have already approved development applications to meet the next five years, and zoning is in place for the next 30. So the scarcity in the land market (the real determinant of price) is actually driven by developers gradually releasing land onto the market (a completely rational commercial thing to do if you want to maintain land prices and yields).

    So perhaps the best way to address the supposed new house affordability crisis is to intervene in the land development market. Now wouldn’t the white shoe brigade hate that?

  18. .

    Surely……

    Bigger houses = a consumer choice (irrespective of supply side efficiencies). No need to Government intervention to address the housing affordability crisis

    No.

    It means people can’t buy new houses to some extent. It also means there is some ma,investment in housing with cheap credit. Does it mean some choice for bigger houses? Yes. But also look at land use rules for blocks.

    Expensive land means people build more expensive houses (Henry Ergas point) = a consumer choice. No need to Government intervention to address the affordability crisis.

    If they can afford it. BTW, the land being more expensive isn’t a choice of anyone but vested interests and government.

    The costs of headworks (roads, sewerage etc) rarely exceed $30K per suburban block, so that isn’t explaining the high cost of land.

    I believe you are incorrect. Abelson, Voss, HIA, Property Council et. al., have consistently found that the cost of taxes and charges all up on new housing costs between 31% to 44% of the final ticket price. You don’t get headworks done unless you can pay the other associated taxes.

    Most local governments have ensured sufficient land is zoned to meet the demands from population growth. For example, in South East Queensland local governments have already approved development applications to meet the next five years, and zoning is in place for the next 30. So the scarcity in the land market (the real determinant of price) is actually driven by developers gradually releasing land onto the market (a completely rational commercial thing to do if you want to maintain land prices and yields).

    The private sector ought to be doing this, not local councils. They’re releasing land to meet their own approval process? How does this prove they’re releasing enough land that the market demands? The market is not supplying.

    So perhaps the best way to address the supposed new house affordability crisis is to intervene in the land development market. Now wouldn’t the white shoe brigade hate that?

    Stop taxes, stop double dipping, repeal planning approval, privatise land and let the market release land as it sees fit.

  19. johanna

    It is worth mentioning that the increased cost of a dwelling is also partly to due regulatory factors. Governments are constantly piling on new requirements (such as bogus “green” rating systems). It is no longer possible in most places to live in a caravan or shed on your block while you build. Many places require you to install a water tank with every new build. And so on.

    Even the smallest, cheapest “starter” house today costs a lot more than the equivalent would have a generation or two ago.

  20. .

    BASIX costs houses in NSW at least 12.5k per home.

    Some “choice”.

  21. brc

    the scarcity in the land market (the real determinant of price) is actually driven by developers gradually releasing land onto the market (a completely rational commercial thing to do if you want to maintain land prices and yields).

    I have recently got to know someone who works in one of those ‘land banking developers’. What he has opened my eyes to is that the cost of development has risen so high due to govt regulations that they can only buy in bulk to justify the expense of developing, and to have a possibility of being able to compete with other projects internally in terms of meeting the minimum project hurdles (which are financial return/risk based). So the reason the big developments happen that are drip fed onto the market is because they are the only ones worth spending the time on anymore, and they can’t get it all done at once because it would be too risky to dump all their development inventory on at the same time, as buyer preferences change, and their ability to partner with builders to deliver a quality product is also restricted. A 100 lot development just can’t make the grade, even though they used to do good business in these, usually by forming a relationship with the landholder and the councils. But the big developers would be unable to do anything about smaller developers with 10 lots if the small developers were actually able to get it done. So the big developer land-banking argument is a side issue – the issue is mainly that the cost of development is too high because of all the regulations, cutting out the smaller developers who are able to respond with supply more quickly.

    Most local governments have ensured sufficient land is zoned to meet the demands from population growth. For example, in South East Queensland local governments have already approved development applications to meet the next five years, and zoning is in place for the next 30

    What a preposterous statement. The governments have ensured sufficient supply for the market. There is no issue!

    Yeah. Just like the Russians used to ensure sufficient bread supplies. I’m sure the bread department used to report to higher ups that the bread supply met the 5 year plan and that there was sufficient bread. The people queued on the street were just an illusion.

    that’s one stop away from ‘darn chinese stole all my houses’

    This is a reference to the recent explanations for high property prices is that Chinese buyers are purchasing all the stock and driving the price up. Of course it wouldn’t matter how many dwellings the chinese purchased if supply was able to expand to meet their preference for Australian property. The reference is that anyone who thinks that negative gearing and 2-vanity bathrooms cause regional areas to have $100k quarter acre blocks doesn’t really understand the issue at all.

  22. .

    So the reason the big developments happen that are drip fed onto the market is because they are the only ones worth spending the time on anymore, and they can’t get it all done at once because it would be too risky to dump all their development inventory on at the same time, as buyer preferences change, and their ability to partner with builders to deliver a quality product is also restricted.

    Absolutely correct. This is what happens with the taxes – they drive down returns and this is the only profitable way to develop.

    Your next two rejoinders are also spot on, brc.

  23. Jon Tomor

    So why, Judy, did you go on Q&A today, 7/07/2014, when you didn’t go to the Snape lecture? I would’ve wanted to see what he said no matter whether or not I agreed with him. After all he did earn a Nobel Prize.
    I just loved the Dorothy Dix question posited by some female in the Q&A audience. That this was a plant stood out like canine testicle. As an economist Stiglitz had a right to comment on Australia; an economist doesn’t just learn about and comment on economics in his own country.
    The ‘argument’ regarding childcare is narrow-minded; it fails to look at the bigger picture. A Fairfax survey found most mothers would rather be working at home than go out into the workforce as such. But alas, this is now well-nigh impossible thanks to the effects of the two nanny state ‘wealthfare’ tax breaks of negative gearing and halved capital gains tax gifted exclusively to speculative investors with the approval of all political parties. Ergo house prices have hit the roof and consequently so have rentals and mortgages and, therefore, Mum must go out into the workforce to help with maintaining a roof over the family’s head whether she likes to or not.
    In median terms, individual earnings are $55K (households $65K), private rentals and mortgages are $20K each and houses cost $540K.
    ABS graphs (Stapleton, e.g.) show that between 1880 and 1970 a house cost 2-3 times annual individual earnings, from 1970 to 1999 house prices rose to 5 times such income and from 1999, the year Howard halved capital gains tax, to around the present time, house prices rose to 10 times such income. No wonder Mum must deposit her child/ren in a part-time orphanage called child-minding centre to help with the rent or mortgage.
    90% of houses sold are now acquired by investors and speculators, only 10% going to first home buyers. This is Third Worldish. Sort of oligarchical. Because of government interference in the ‘free, fair and open housing market place’, there is no housing market place in Australia; only a ‘speculative investment housing market’.
    The two taxpayer-funded tax-breaks for the speculative investor/nest-eggers are now worth $17 billion a year. But ne’er a word from a single politician from any stench political party as to why these speculator/investors are exempt from Hockey’s mantras the age of entitlement is over, the age of responsibility has begun and everyone must help to do the heavy lifting. What bullshit.
    I “liked” Abbottomy’s fairy godmother Murdoch doing a ‘dresden’ on an Australian political party, but. It wasn’t any of his business. Was/is he upset about something? His young wife left him last year (couldn’t he get it up any more for her?) and then of course there’s the festering wound of the hacking scandal. Makes one mad doesn’t it?
    I’m not in any way associated with the LNP, Labor, the Greens, or the Brobdingnags for that matter. But I do believe prospective first nesters starting out in adult life have priority over speculative investor nest-eggers at the arse-end of their lives

  24. Jon Tomor

    PS: The last bit shouldn’t have been in italic text.

  25. Leo

    Wow, the world of the far right is a scary place.

    Interesting that some one in public office feels that it’s appropriate to set up a blog such this.

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