Tag Archives: housing affordability

Blaming immigrants for unemployment, lower wages and high house prices is too simplistic

The Conversation

Robert Breunig, Crawford School of Public Policy, Australian National University and Mark Fabian, Australian National University

Australia should cut its immigration intake, according to Tony Abbott in a recent speech at the Sydney Institute. Abbott explicitly cites economic theory in his arguments: “It’s a basic law of economics that increasing the supply of labour depresses wages; and that increasing demand for housing boosts price.”

But this economic analysis is too basic. Yes, supply matters. But so does demand.

While migration has increased labour supply, it has done so primarily in sectors where firms were starved of labour, and at a time of broad economic growth.

Immigration has put pressure on infrastructure, but our problems are more a function of governments failing to upgrade and expand infrastructure, even as migrants pay taxes.

And while migrants do live in houses, the federal government’s fondness for stoking demand and the inactivity of state governments in increasing supply are the real issues affecting affordability.

The economy isn’t a fixed pie

Let’s take Abbott’s claims about immigration one by one, starting with wages.

It’s true that if you increase labour supply that, holding other factors that affect wages constant, wages will decline. However, those other factors are rarely constant.

Notably, if the demand for labour is increasing by more than supply (including new migrants), then wages will rise.

This is a big part of the story when it comes to the relationship between wages and migration in Australia. Large migrant numbers have been an almost constant feature of Australia’s economy since the end of the second world war, if not earlier.

But these migrants typically arrived in the midst of economic growth and rising demand for labour. This is particularly true in recent decades, when we have had one of the longest periods of unbroken growth in the history of the developed world.

In our study of the Australian labour market, we found no relationship between immigration rates and poor outcomes for incumbent Australian workers in terms of wages or jobs.

Australia uses a point system for migration that targets skilled migrants in areas of high labour demand. Business is suffering in these areas. Migrants into these sectors don’t take jobs from anybody else because they are meeting previously unmet demand.

These migrants receive a higher wage than they would in their place of origin, and they allow their new employers to reduce costs. This ultimately leads to lower prices for consumers. Just about everybody benefits.


Read more:
A focus on skills will allow Australia to reap fruits of its labour


There’s an idea called the “lump of labour fallacy”, which holds that there is a certain amount of work to be done in an economy, and if you bring in more labour it will increase competition for those jobs.

But migrants also bring capital, investing in houses, appliances, businesses, education and many other things. This increases economic activity and the number of jobs available.

Furthermore, innovation has been shown to be strongly linked to immigration. In the United States, for instance, immigrants apply for patents at twice the rate of non-immigrants. And a large number of studies show that immigrants are over-represented in patents, patent impact and innovative activity in a wide range of countries.

We don’t entirely know why this is. It could be that innovative countries attract migrants, or it could be than migrants help innovation. It’s likely that the effect goes both ways and is a strong argument against curtailing immigration.


Read more:
How migrant workers are critical to the future of Australia’s agricultural industry


Abbott’s comments are more reasonable in the case of housing affordability because here all other things really are held constant. Specifically, studies show that housing demand is overheated in part by federal government policies (negative gearing and capital gains tax exemptions, for instance) and state governments not doing enough to increase supply.

Governments have responded to high housing prices by further stoking demand, suggesting that people dip into their superannuation, for instance.

In the wake of Abbott’s speech there has been speculation that our current immigration numbers could exacerbate the pressures of automation, artificial intelligence and other labour-saving innovations.

But our understanding of these forces is nascent at best. In previous instances of major technological disruption, like the industrial revolution, the long-run effects on employment were negligible. When ATMs debuted, for example, many bank tellers lost their jobs. But the cost of branches also declined, new branches opened and total employment did not decline.


Read more:
New research shows immigration has only a minor effect on wages


In his speech, Abbott said that the government needs policies that are principled, practical and popular. What would be popular is if governments across the country could fix our myriad policy problems. Abbott identified some of the big ones – wages, infrastructure and housing affordability.

What would be practical is to identify the causes of these problems and address these directly. Immigration is certainly not a major cause. It would be principled to undertake evidence-based analysis regarding what the causes are and how to address them.

The ConversationA lot of that has already been done, notably by the Grattan Institute. What remains is for governments to do the politically difficult work of facing the facts.

Robert Breunig, Professor of Economics, Crawford School of Public Policy, Australian National University and Mark Fabian, Postgraduate student, Australian National University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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The latest ideas to use super to buy homes are still bad ideas

The Conversation

John Daley, Grattan Institute and Brendan Coates, Grattan Institute

Treasurer Scott Morrison wants to use the May budget to ease growing community anxiety about housing affordability. Lots of ideas are being thrown about: the test for the Treasurer is to sort the good from the bad. Reports that the government was again considering using superannuation to help first homebuyers won’t inspire confidence. The Conversation

It’s not the first time a policy like this has been floated within government. While these latest ideas to use super to help first homebuyers are marginally less bad than proposals from 2015, our research shows they still wouldn’t make much difference to housing affordability.

A seductive idea with a long history

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Both sides of politics took proposals to the 1993 election, before Prime Minister Paul Keating scrapped it upon his re-election.

Former Treasurer Joe Hockey last raised the idea in 2015 and was roundly criticised, including by then Coalition frontbencher Malcolm Turnbull.

Politicians are understandably attracted to any policy that appears to help first homebuyers build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But as we wrote in 2015, that change would push up house prices, leave many people with less to retire on, and cost taxpayers in the long run.

Having learned from that experience, the government has instead flagged two different ways to use super to help first homebuyers. Neither proposal would make the mistake of giving first homebuyers complete freedom to access to their super. But nor would they make much difference to housing affordability.

Using voluntary super savings for deposits

The first proposal reportedly supported by some in the Coalition, but now denied by the Treasurer, would allow first homebuyers to withdraw any voluntary super contributions they make to help purchase a home. Any compulsory Super Guarantee contributions, the bulk of Australians’ super savings, could not be touched.

Using super tax breaks to help first homebuyers build their deposit would level the playing field between the tax treatment of the savings of first homebuyers and existing property owners.

First homebuyers’ savings typically sit in bank term deposits, where both the initial amount saved and any interest earned is taxed at full marginal rates of personal income tax. In contrast, the nest eggs of existing property owners are taxed very lightly. For owner occupiers, any capital gain is tax free. For investors, capital gains are taxed at a 50% discount, and they get the benefit of negative gearing.

But even if there’s some merit in allowing first homebuyers to use super tax breaks to save for a home, it’s unlikely to make much difference. Few people are likely to take advantage of the scheme. Households are reluctant to give up access to their savings, especially when they’re already saving 9.5% of their income via compulsory super.

In fact the proposal works out to be very similar to the former Rudd government’s First Home Saver Accounts, and is likely to be just as ineffective. First Home Saver Accounts provided similar financial incentives to help first homebuyers build a deposit. Treasury expected A$6.5 billion to be held in First Home Saver Accounts by 2012. Instead only A$500 million had been saved by 2014, when Joe Hockey abolished the scheme, citing a lack of take up.

A “shared equity” scheme for super funds

The Turnbull government is reportedly also considering a “shared equity scheme” where workers’ super funds would own a portion of the property investment, and money would presumably be returned to the super fund when the property was sold.

Details are scarce, but the proposal raises several questions.

First, would the super fund use only the super savings of the co-investor to help buy the home, or would they add capital from the broader super fund pool?

Second, how would the super fund generate a return on the investment? A super fund that invests in rental housing gets the benefit of a rental income stream. A super fund co-investing in owner-occupied housing would not. The super fund could take a disproportionate share of any capital gains to compensate, but that hardly seems attractive for the funds in a world where interest rates are already at record lows.

Third, why involve super funds in a shared equity scheme in the first place? Australia’s super sector is already notoriously inefficient – total super fund fees equate to more than 1% of Australia’s GDP each year. A shared-equity scheme would inevitably add to super funds’ administration costs.

If the federal government is serious about super funds investing in housing, it needs to encourage wholesale reform of state land taxes, which levy a higher rate of land tax the more investment property a person owns. This discourages institutional investors such as super funds from owning large numbers of residential properties, because they pay much higher rates of land tax on any given property than a mum-and-dad investor.

Focus on what matters

If Scott Morrison really wants to tackle housing affordability, he can no longer ignore those policies that would make the biggest difference. That means addressing both the demand and the supply side of housing markets.

On the demand side, that means reducing government subsidies for housing investment which have simply added fuel to the fire. Abolishing negative gearing and cutting the capital gains tax discount to 25% would save the budget about A$5.3 billion a year, and reduce house prices a little – we estimate they would be about 2% lower than otherwise.

The government should also include the value of the family home above some threshold – such as A$500,000 – in the Age Pension assets test. This would encourage senior Australians to downsize to more appropriate housing,
while helping improve the budget bottom line.

At the same time the government should support policies that boost housing supply, especially in the inner and middle ring suburbs of our major cities where most of the new jobs are being created. Population density in the middle ring has hardly changed in the past 30 years.

The federal government has little control over planning rules, which are administered by state and local governments. But it can provide incentives to those tiers of government, if it is looking to do something that would really improve home ownership.

While there are plenty of ideas to improve affordability, only a few will make a real difference, and these are politically hard. In the meantime, the latest thought bubbles about using super savings for housing might be less bad than in the past, but they would be just as ineffective.

John Daley, Chief Executive Officer, Grattan Institute and Brendan Coates, Fellow, Grattan Institute

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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