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The government is missing the opportunity to solve the housing crisis

Peter Hartcher

The governor of the Reserve Bank, Phil Lowe, has sometimes found himself sitting next to Scott Morrison at lunch and dinner functions over the past couple of years.  The head of the central bank has used the opportunity to try to persuade Australia's treasurer of the need to take big, bold action. 

Australia, argues Lowe, needs to build productive new assets on a historic scale, and this era of super-low global interest rates means that now is the best possible time. Money is cheaper now than at any time in 5000 years of recorded history. Governments and businesses should be borrowing to build new power plants, bridges, rail, roads, ports, airports and other infrastructure.

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Sukkar: Get a 'highly paid job'

Michael Sukkar, a Coalition MP assigned with the job of tackling Australia's housing affordability problems, offers his advice on how to get on the property ladder.

Is Lowe trying to sell loans on commission on the side? No. So why does the man in charge of official interest rates care so much about infrastructure?

Because the Reserve Bank has been unhappy that it's had to cut interest rates to all-time lows for the past six years as the chief source of support to the economy.

Why is housing in Sydney and Melbourne so atrociously out of reach for the generation now looking to buy a home? Partly because of record low interest rates.

Phil Lowe, and his predecessor Glenn Stevens, want governments to do more to support the economy so the Reserve Bank can do less.  If the central bank could start merely to normalise interest rates, with the official rate now just 1.5 per cent, the housing boom would slow and home prices, eventually, would stabilise. 

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That would be a real way of addressing the national crisis we are creating – a  country where young people cannot afford their own housing. Lowe may be paid $1 million a year, but he lives in Sydney, has three kids and knows that even the children of well-off families will struggle to buy housing in the most unaffordable market in the world bar Hong Kong.

And, by building productive assets, it would lift medium-term growth and long-term productivity. Australia's record on building big assets to make our cities workable is dire. Australia has spent 30 years arguing and agonising over building a single high-speed train line to connect Sydney, Canberra and Melbourne. In that 30 years, do you know how much high-speed rail the Chinese have built? The answer is 20,000 kilometres. China intends to double the length of this network in the next eight years.

Australia's need for more power plants, roads, rail, bridges, ports and airports is dire. Ken Henry, former secretary of the Treasury and now chair of National Australia Bank, made the point about Australia's failure forcefully this week:

"We do not have the infrastructure capacity to support today's population, far less the population of the future," he told the Committee for Economic Development of Australia on Thursday.

"On the basis of official projections of Australia's population growth, our governments could be calling tenders for the design of a brand new city for two million people every five years; or a brand new city the size of Sydney or Melbourne every decade; or a brand new city the size of Newcastle or Canberra every year.  Every year.

"But that's not what they are doing. Instead, they have decided that another 

3 million people will be tacked onto Sydney and another 4 million onto Melbourne over the next 40 years ...

 "And even if we do manage to stuff an additional 7 million people into those cities what are we going to do with the other 9 million who will be added to the Australian population in that same period of time?  Have you ever heard a political leader addressing that question?  Do you think anybody has a clue? At the very least, we are going to have to find radical new approaches for infrastructure planning, funding and construction."

Without sensible solutions to hand, politicians are turning to extreme ones. Tony Abbott's speech on Thursday night is an example. He proposed cutting the immigration intake to take pressure off housing prices: "Why not say to the people of Australia," posed Abbott, "we'll cut immigration to make housing more affordable?" 

This is remarkable. This is a former prime minister who presided over Australia's normal, relatively large immigration intake who now calls for it to be cut. 

This is a measure of Abbott's own ambitions for a comeback as a rightwing hero, but it's also a sign of the times – the main political parties are edging closer to Pauline Hanson territory in search of solutions. One Nation policy? Zero net immigration compared to the current level of about 200,000 a year.

Why is Australia's normal intake relatively large, adding about 1 per cent to the population a year? And why have both major parties supported this for so long? We don't do it to get a better menu of international dining options. Or to be nice to foreigners. We do it because it's in Australia's national interest.  Because immigrants are younger than the average population, as a deliberate act of government policy. This slows the ageing of Australia's population. That, in turn, slows the oncoming rise in national health costs. 

Indeed, Phil Lowe was asked about Abbott's idea by a parliamentary committee on Friday. Why not cut immigration to ease housing prices? "If the only objective you have is to reduce housing prices, a cut to immigration would make a difference in the short term," Lowe replied, "but we have other objectives.

"Immigration is a source of national strength. You would lose that source of strength," he told the politicians. "It's a source of dynamism and vigour and ultimately of national competitiveness. To give that advantage up just so we can take pressure off housing prices I find problematic. Much better to address the supply side." 

Meaning? Australia must build more housing. In part, there is a burst of apartment-building going on, but much, much more needs to be done. 

If you don't build the infrastructure in support, you're simply adding to congestion, frustration, blackouts, hospital queues, the cost of doing business and the cost of living. And that will lead to more simplistic, populist, quack cures that will only inflict more harm and feed the cycle of disgruntlement. It's a dead end, not a national future.

The Turnbull government's response to this situation? It's threefold. First, it says that it's already on the job with a $50 billion infrastructure program. Sounds impressive. But the Department of Infrastructure says that, in truth, it's a maximum of $42 billion, and that's spread over five years or more. And, however much it is, it's evidently not enough.

Second, the Turnbull government says it's developing Cities Plans to build new support systems for cities by tapping new funding methods, such as "value capture".

So a new rail line would be built and funded, for instance, by the sale of the right to build shopping and apartment complexes above and around the new stations, "capturing" for the public purse some of the private value that the rail itself creates. This is a promising yet slow-moving process, however, and so far only one City Plan has been agreed, that of Townsville.

Third, the government says it would like to do more but is simultaneously trying to curb the federal deficit, which has blown out every year since 2009. 

This is truly a key constraint.  So Lowe makes the point that the government need not fund everything itself. The private sector can do most of the funding; the world is awash in cheap capital seeking solid investment projects.

Ken Henry has pretty much given up on the political system to deliver anything at all. He urges business to take up leadership in solving this and other big national problems. But governments state and federal do, however, have a unique responsibility for planning, approving and orchestrating major projects. This is the indispensable minimum role of politicians; nothing important can be built without it. And even that, says Lowe, is woefully underdone. 

Lowe also makes a key distinction between "good debt" versus "bad debt". Good debt is an investment in a productive asset; bad debt is how an irresponsible government pays for its ordinary spending. 

Australia has scope to use a combination of private capital and some limited government "good debt" to build the country's future. Indeed, the International Monetary Fund has been urging Australia to do just that.

Australia's best chance to take  Lowe's advice has probably passed. A year ago, the federal government was able to borrow money on world markets at 1.8 per cent; today it's 2.8 per cent. 

Yet chances remain, and 2.8 per cent is still a very low rate by history's measure. The next best opportunity is the May budget. Scott Morrison has the chance to break the cycle. But he would need to be big, bold, and confident enough to explain that he is building Australia, not just building bigger debt. 

Morrison's responses so far suggest that he's not up to the task and not interested in attempting it, a creature of the political parlour game rather than a reformer of it.  It would be a marvel if Morrison and the other ministers of the Turnbull government could prove Ken Henry's dark diagnosis wrong: "The reform narrative of an earlier period has been buried by the language of fear and anger," he despaired this week. "It doesn't seek to explain; rather, it seeks to confuse and frighten. Meanwhile, the platform burns." 

 Peter Hartcher is political editor.

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