Voters see through the housing wealth effect

As Australia's property fortunes become crucial for the next election, Labor will make much of its ability to keep interest rates low. But for many voters that's unlikely to be enough.

Some Queensland voters will go into this year's federal election with a bit of an identity crisis – news in the past couple of days shows south-east Queensland is home to some of Australia's least affordable homes, and an "extreme buying opportunity".

Neither epithet is good news for an incumbent government. As Steve Keen noted yesterday, when homes are 'unaffordable', voters have become accustomed to demanding that governments stop 'locking first home buyers out of the market' by increasing federal and state grants – the biggest recent increase being the Rudd government's trebling of the federal first home owners' grant during the GFC.

And an 'extreme buying opportunity' for the young means substantial erosion of personal wealth for older generations who might be thinking of offloading investment properties to take advantage of a resurgent stock market.

This is all bound to make Treasurer Wayne Swan a bit edgy. A ReachTEL poll published over the weekend suggests he may cop a hiding from voters in his north Brisbane electorate of Lilley, and lose his seat.

But troubles in the housing market are not confined to Queensland. Western Australia is seeing rents rising at an alarming pace – up around 13 per cent last year – as a falling-off of building approvals works against the influx of workers servicing the state's massive mining and energy projects.

That won't have a huge effect on Premier Colin Barnett's prospects at the March election – his Liberal-National government is still expected to romp home – but will feed into festering resentment of Canberra.

Why, ask disgruntled sandgropers, do we pour so much money into the federal coffers, gets disproportionately little back in GST and have to fight pitched battles with Treasurer Swan on who has the right to tax our resources?

Perth residents paying well over the odds for housing, will watch their state's public finances swing from a budget surplus of $140 million this financial year to a projected deficit of $190 million next year. That is not, strictly speaking, the fault of Treasurer Swan's disastrous mining tax, but the acrimony between Barnett and Canberra in the past two years will give many voters that impression.

Leaving state matters aside, the wealth effect experienced by Australians across the board will be crucial for the next federal election. Yes, share investments are booming (for now), but the old lark of negative gearing, which relies on capital gains to offset the nominal loss in the rental-yield/mortgage-cost equation is looking like a dead duck.

With the election still at least nine months away, a lot can go wrong for house prices. Several friends and family members have quizzed me in recent months as to whether or not they should sell up and bank large capital gains, rather than risk further downside in the housing market. Every investor's position is different, and hence there's no one prescription (nor is it for this column to give such advice).

However, as Steve Keen keeps pointing out, house prices can only stretch the debt-to-income ratio so far, meaning that even if you don't expect dramatic falls in house prices, capital gains of the past 15 years can't be repeated (Built on the backs of first home buyers, January 22).

So, on the campaign trail, Swan, Gillard et al will be making much of their ability to keep interest rates down and make housing more affordable. (Actually, to make indebtedness more affordable, but let's not be negative!)

On the other side of politics, Tony Abbott and Joe Hockey will most likely be pinning any house price weakness/falls on low consumer and business confidence. That line has become a stock response in recent months – if Labor wasn't borrowing and spending so much (Swan's lost surplus was more than a fetish, January 15) punters would feel more confident to splash out in retail outlets and, presumably, start borrowing more for their dream homes.

Yes, it's a long way to election day. But whatever the news cycle throws up in the meantime, house prices will continue to be the canvas on which many other pictures of our nation are painted. If too many holes appear, voters will see through just about any other promises the pollies make.

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