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Last updated: August 17, 2010 3:35 pm
In her two months in office, Australian prime minister Julia Gillard has been busily unpicking various policies of her predecessor, Kevin Rudd: the mining tax, asylum seekers, carbon trading. She has more or less ignored the housing market, which could be more destructive than all those issues put together.
Like many other debt-addicted economies, Australia entered the global financial crisis with heavily overvalued real estate. It still has it, thanks in part to the government’s determination to keep house prices rising. In October 2008, while the base interest rate was rapidly descending to a half-century low, it tripled grants to first-home buyers.
In May this year, the landmark Henry tax review recommended the elimination of a peculiarly generous Australian tax beak for property investors: negative gearing, which lets the cost of borrowing to acquire an asset be deducted from all personal income, not just the revenues from the related asset. Treasurer Wayne Swan ignored the advice.
Traditional measures suggest house prices remain between 35 and 50 per cent above fair value, making the associated mortgage debt a major risk to the whole economy. In June, housing loans accounted for an average 64 per cent of gross loans at the nation’s four largest lenders, up from 59 per cent three years earlier.
The candidates’ reluctance to discuss housing is understandable, since two-thirds of voters own homes, often with big floating-rate mortgages. But the winner may have to face the issue.
Loans on owner-occupied houses, the traditional bedrock of the market, have been trending down since mid-2009; approvals for new construction turned down a few months later and prices across Australia’s capital cities dropped slightly in June after 17 consecutive months of growth. Far from being resisted, the incipient correction should be helped on its way.
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