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Chris Lamont's blog

GDP smashed by preoccupation with inflation target

Chris LamontThe effect of a restrictive monetary policy on investment in the private rental market provides a useful lesson. Rate rises have starved investment while demand has increased; add to that record low vacancy rates - is it any wonder that rents across the country have increases in the order of 10%+. 

The release of the Australian National Accounts on Wednesday [Sept 3, 2008] confirms what most Australians already knew, a rapid slow down in domestic economic activity.  In seasonally adjusted terms GDP increased by just 0.3 per cent in the June quarter. Excise investment in machinery and equipment in Western Australia from the result, and you get zero growth for the quarter.

Notwithstanding a rapid slowing in the economy, a pre-occupation with an ageing inflation target has been maintained.  A pre-occupation with this 15 year-old inflation target has muzzled the adoption of a monetary policy that maintains a ‘realistic' inflation target.  Such a target should be mindful of external price shocks and capacity constraints within the Australian economy. 

To suggest that inflation woes experienced over the last 18 months were a consequence of consumer exuberance ignores the fact that investment in capacity building infrastructure has been sadly lacking for quite some time.  Furthermore, it ignores the effect of external price pressures most notably the price of oil.

Future Fund could do some heavy lifting at home

Chris LamontUsing the Future Fund to create an institutional market for residential investment would provide assistance to the more than 600,000 households in rent stress and bolster the stock of affordable rental accommodation in Australia. 

The Future Fund established in 2006 was established to meet the cost of public sector superannuation liabilities, however, it could also be used to help those battling rent stress.

The Fund could be used to create an institutional market for residential investment that would provide assistance to the more than 600,000 households in rent stress and bolster the stock of affordable rental accommodation in Australia. 

The National Rental Affordability Scheme (NRAS) announced by federal government is a measure appropriately targeted at boosting the supply of affordable rental properties.  However, the challenge for the scheme will be securing investors and credit, particularly given pressures on capital markets and the rather low yields from residential investments.   

As at April 2008, the Future Fund had $61.48 billion to invest.  Using this sum the fund is required to deliver a return of at least 5 percent above CPI over a rolling 10 year period.  Against this requirement it would seem that the Future Fund represents a viable source of capital for NRAS. 

Gen X not unreasonable

Chris LamontWhen it comes to housing affordability, Gen X is clearly short changed. Bagged in the media for being unrealistic in terms of housing expectations, it is quite revealing to go back twenty years to compare the plight of Gen X with that of their parents.

Of the total number of first homebuyers entering the market, less than 20 per cent purchase a new home.  The overwhelming majority of first homebuyers are looking to buy the cheapest house, unit or flat they can get their hands on. In terms of expectations, most are seeking accommodation within 20 kilometres of work and with reasonable amenity and surrounding support services. These requests are hardly unreasonable in today's society.  

So just how hard is it for Generation X to enter home ownership.  Well perhaps an indication of the burden is best assessed by comparing first the house price to average income ratio of 1978 to 2008.  In 1978 this ratio was 3.8 to 1 now this ratio is 9 is to 1, this means the median new house price is nine times the median annual income.

The amount of tax levied on the standard house in 1978 compared to today in part explains just how difficult it has become for Generation X. The price of a new home in Australia (based on weighted average of 8 capital cities) was $37,400 in 1978 today it is $469,000.  

Adding cost through the duplication of regulation

Chris LamontIt is not uncommon for houses built on either side of the street to have differing obligation and regulations imposed. 

Australian governments have embraced a need for harmonisation over the last decade. It is important to point out, however, that in respect to building regulation, the hard work was done two decades ago.

Notwithstanding the good work that was done with establishment of the Australian Building Codes Board, there are those within state and local government bureaucracies who feel that consistency in planning laws is old hat and a better way to run the building industry would be to impose hundreds of different standards and regulations unique to each jurisdiction.

The building industry faces a quagmire of red tape. Harmonisation through the Building Code of Australia (BCA) is the one saving grace for both builders and, importantly, for Australia's manufacturing and supply industries. The benefits of micro-economic reform achieved by national consistency must be preserved and can be under a united and harmonised approach under the BCA.

Energy efficiency has become an accepted technical standard that should be addressed in the design of all new buildings. Yet on the east coast of Australia, Queensland, New South Wales and Victoria have different requirements. Add to this the complexity that local government sometimes impose.  It is not uncommon for houses built on either side of the street to have differing obligation and regulations imposed.