Abbott's anguish in the house Labor built

When John Howard candidly told Australians they'd "never had it so good" in 2006, he learned the hard way that the truth doesn't stand a chance against other powerful narratives run in national media – that we're a nation of battlers doing it tough.

The latter story is easy to tell in an era of unusually high private debt, because no matter how many 'things' you've bought with somebody else's money, somewhere in your financial subconscious is the knowledge that gearing works both ways – to accelerate your profit in times of growth, and multiply your losses in times of recession.

Yesterday's housing finance data should be a wake-up call for both the federal government and opposition, but for the latter in particular – because it still looks most likely that Tony Abbott will preside over the really nasty part of the turn in the nation's private debt position.

Since the onset of the GFC both state and federal governments have used first-home-buyer bonuses to stimulate the housing market – that is, to encourage home buyers to borrow more than would otherwise be possible.

The net effect is liking drinking a strong coffee to 'wake up' on a long drive. When the first one wears off, you'll need an even stronger one to pump the adrenal glands again; and then a stronger one still until all your energy is burned up, and you fall asleep at the wheel anyway.

Yesterday's ABS data showed a seasonally adjusted decline of 1.8 per cent in the value of home loans approved.

The split between investors and own-occupiers tells the more alarming story – investor commitments, by value, fell a seasonally adjusted 2.7 per cent against an decline in owner-occupier commitments of 1.4 per cent.

And on the horizon is the prospect of Labor cutting generous tax concessions on property for self-managed superannuation fund holders.

As I wrote last Tuesday (This is the way to pay for Labor's rash promises, September 4), super tax concessions are perhaps the biggest sliced of returned tax revenue available to the federal government as it tries to shore up the federal budget.

Laura Tingle reported in yesterday's Financial Review:"Generous capital gains tax breaks for self-managed superannuation funds which invest in property are the government's clearest target."

In the past four years, SMSFs have ramped up commercial property holdings more than residential property – by 49 per cent and 37 per cent respectively – but it is the housing market that is likely to suffer most if there is a stampede to cash out what was once the 'safe as houses' investment.

The counter arguments that have been made in the past four years are good, in theory, but are failing to provide the market support their proponents suggest.

The main arguments are firstly that we have a housing shortage that will drive demand come what may; and, secondly, that the RBA has been 'keeping its powder dry' by keeping real interest rates exceptionally high, and rate cuts can always breath new life into the market.

On the first point, the housing 'shortage' is not showing up in new dwellings – there are alternatives to families expanding into new housing stock, such as staying a year or two more with mum and dad, or staying in house-share arrangements. Buyers are holding off buying so as to take advantage of softening prices. Yesterday's data showed a staggering fall of 6.8 per cent in the number of loans approved for new dwellings.

On the second point – that RBA rate cuts will stimulate further borrowing – economists were dismayed yesterday that the two rate cuts at the end of 2011 had failed to bump up borrowing, and the jury is still out on whether the 75 basis points of cuts made in May and June can solve this problem.

John Howard's comment, that we'd "never had it so good", was made just before the zenith of the global private debt bubble that we now call the GFC.

Since then our savings rate has increased, borrowing appetite has decreased, consumer confidence and retail conditions have tumbled and only a series of 'strong coffees' has kept housing from falling further.

Against this backdrop the Gillard government has continued to issue debt way beyond the stimulus phase of the GFC clean-up, and on top of that has now added around $15 billion in extra spending – in education, national disability insurance, dental care and further asylum seeker processing measures.

Fast forward two years, and a newish Abbott government will likely be dealing with further contraction in the debt-funded part of national consumption and an anaemic or bleeding housing market.

It will also likely be suffering lower corporate tax revenues from mining (the MRRT, which Abbott has vowed to repeal, will be so small as to be virtually irrelevant), and will be slashing public service jobs to try to keep the budget in surplus.

Moreover, if the dollar does eventually follow the terms of trade down – it's currently staying stubbornly high despite coal prices being off 30 per cent and iron ore down nearly 50 per cent so far this year – Australian consumers will begin 'importing inflation'.

All of which means that the moment in which Australians 'never had it so good' was probably some time in the past few months.

Get ready, therefore, for many nostalgic references by Labor to the 'golden era' of the Gillard government, not the Howard government, during the 44th parliament.

Given the number of ill winds blowing towards Australian households at this time, one has wonder why Tony Abbott wants to be in charge at all.

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