6 April 2020
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An outside-the-square solution to our property price problem

These are crazy times for Sydney and Melbourne house prices, so maybe we need a ‘crazy’ or a thinking-outside-the-square idea to solve our house price problem, which really only exists in Sydney and Melbourne.

There are no magic bullets in economics but I learnt a lot from the creator of the term “lateral thinking” — Edward de Bono — who explained to me that great entrepreneurs, politicians, sporting legends, etc. beat their opponents and succeed by being different. They think outside the square.

He was once asked to solve a parking problem for a UK town close to London where people parked all day in the high street to catch their train to work. This hurt the business of shops in the street as customers found it hard to park.

The local council did not want to impose parking fees, I guess for political reasons, so they turned to Edward.

His outside-the-square idea was to create signs that warned that parking lights must be left on while parking in the high street. Short-term shoppers would not have an issue with this reform but daylong parkers could not risk a flat battery when they return from London after a day’s work!

So, it’s in this vein that I suggest I have a solution to our property price problem, but will the Turnbull Government have the guts to try it? Before I reveal it and await reactions from those smarter than me, here’s the current situation with property in Oz.

If you’re buying properties in Sydney or Melbourne, you really need to do your homework because the bubble word is starting to be used and it’s starting to even worry me a little. Buying anywhere else, I’d be careful of Brisbane apartments in and around the inner city but most other areas are not stressing officialdom.

I’m not alone being a little worried, with the Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA) getting a tad nervous, though they still haven’t uttered the bubble word.

In the old days, the RBA would simply raise interest rates to chase away Sydney and Melbourne over-ambitious buyers but these are crazy times.

In the past, concerned central bank bosses have opted for two quick rate rises in a row. Maybe one would be 0.5% and not an expected 0.25%. However, our economy isn’t strong enough for that right now.

With wages growth slow but with hopes that things will improve slightly this year, and business investment still not in gangbusters land, the RBA can’t simply raise interest rates.

Also, such rate moves would push up the Oz dollar over 80 US cents and hurt economic growth.

The RBA is caught between a rock and a hard place. They really wish homebuyers and investors would stop buying properties or potential sellers at least started putting their homes on the market to increase supply to depress price rises.

So, in crazy times, maybe we need a crazy or outside-the-square idea to stop Sydney and Melbourne investors turning up to auctions and over-paying for properties and squeezing out first homebuyers or those trying to upgrade their principal homes.

Given the problem the RBA has with raising rates now to take air out of the balloon (not the bubble), in his May 9 Budget, Treasurer Scott Morrison is tipped to come up with a property price play policy and here’s a policy option worth thinking about.

So, what’s the solution?

Labor wants to kill negative gearing for existing homes but leave it for new homes but that could make investors chase new stuff because this is where the tax deductions would be. It would be good for getting building going, but younger people largely buy new homes in cheaper areas and so investors could crowd out that market and drive up prices.

As an alternative, why doesn’t the Government close down negative gearing for all new purchases for old and new homes to take the heat out of the Sydney and Melbourne markets? I think taking it away forever could lead to a price collapse and it reminds me of Labor imposing a mining tax just when the mining boom was about to start de-booming in 2013. The Government might even be able to restrict negative gearing in Sydney and Melbourne for two years, which sounds very prescriptive, but why not think outside the square?

Those who despise negative gearing forget that Sydney house prices did nothing for ten years and negative gearing was operating then, and if it wasn’t prices might have collapsed!

We are in a special or maybe a crazy period of time where the RBA has record low interest rates but can’t easily raise them. 

And as these are extraordinary times, it calls for an economic policy I have never thought of until this week, but it has appeal.

Of course there are other policies that might work — such a quantitative controls where banks restrict what they lend — but many of these might hurt borrowing in places such as Perth, Darwin, Adelaide and Brisbane where house price rises are not a problem.

I know my suggestion is unusual but it does not mean it wouldn’t work. If investors are going mad in Sydney and Melbourne then take them out of the play for one or two years.

Now that’s thinking outside the square!

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