How Canberra's favourite book might help my hunt for a first home

By MILLIE MUROI, Economics Writer

Anyone who has rented (or knows a renter) knows the woes of living on someone else’s terms: unresponsive landlords, rent hikes and the threat of getting evicted despite doing everything right. There’s also the bitter aftertaste of effectively paying off someone else’s mortgage – or simply topping up their bank balance while watching your own dwindle.

Recently, I’ve started looking for an exit – or rather an entry. House and unit price growth across most of our capital cities has slowed recently, but they are still steadily climbing, meaning many home owners continue to watch their wealth grow. That’s made it harder for many first home buyers to get a foothold in the housing market, but I’m also increasingly getting the sense that I’m missing out on boarding the growth train so many people seem to be on.

Between inspecting some properties this week (as a hopeful home buyer rather than a renter for the first time), I started chewing through a copy of the book finding its way onto the bedside tables of our top decision-makers and their staffers.

Two American journalists, Derek Thompson and Ezra Klein, have lit a bit of a fire under the seats of left-leaning governments – and lefties more broadly – with their new book: Abundance.

While both ends of Australia’s political spectrum have zeroed in on housing affordability recently, those on the left have generally believed in the power of government to look after people, including yanking housing back into the reach of everyday Australians.

Thompson and Klein have plenty of qualms about the political right, too. But their speciality lies in getting lefties around the world to reflect on ways they might be letting good intentions get in the way of solving some of our most pressing problems. Chief among them? The housing crisis.

Why, when we’ve become better and faster at doing so many things, have we seemed to become slower at building one of the most basic necessities of life? And why is homeownership stuck at such low rates?

There’s no shortage of answers – many of which help to explain part of the problem. But the big one, write the American duo, is this: the thicket of red tape we’ve wrapped ourselves in.

Abundance brings a fresh left-wing twist to a topic often seen as a buzzword of the right-wing anti-government crusade.

A lot of our regulation has important aims: protecting the environment, making sure workplaces – including construction sites – are safe, and stopping that big company from setting up a huge, noisy factory right next to your house.

When businesses need to comply with hundreds of rules at federal, state and local levels on where and how houses are made, it becomes a hugely time-consuming process that not only slows down construction but discourages would-be developers or builders from giving it a go.

It’s like trying to send a truck to a flood-affected region, stocking it up with so much stuff – medicine, sandbags, food, tools, life vests – that it takes weeks or months to get there. You might get all the important aid there, but it will take so long it may have been better to leave some things behind.

The Productivity Commission warned this year that Australia is building half as many homes for every hour worked compared with three decades ago. Among the biggest handbrakes? Planning regulations have increased markedly and can run into thousands of pages.

This “unambiguously” jacks up the cost of development and construction, and ultimately the cost of housing for Australians, the commission’s experts said.

Even when all existing laws are met, minor objections from residents can cause delays to housing projects. And some regulations, as my colleague Shane Wright pointed out last week, just seem arbitrary: a bedroom by Victorian standards, for example, is not liveable if it’s not at least 3 metres by 3.4 metres in size.

This build-up of regulation and processes comes with several costs. Economists are especially obsessed with one otherwise invisible problem called “opportunity cost”: essentially what we give up or miss out on by taking a certain path.

If you buy a boat, you can’t use that cash to get a new car or renovate your house. Life, and economics, is about trade-offs.

By having lots of regulation, we might ensure only “perfect” buildings get built. The opportunity cost means we end up with fewer buildings that are built slower.

It’s harder to recognise because it’s not a cost most people can see. Even when you’re shopping for a home and struggling to nab one because there’s not enough of them, you probably don’t realise that regulation has choked supply.

The growing pile of regulations is also a great example of what economists call “diminishing marginal returns”. That’s the principle that the more you have of something, the less benefit you tend to get out of adding more of that thing. One block of chocolate, for example? Delicious. By the time you’ve eaten two, it’s probably getting a bit much. And by block five? You might be taking a queasy trip to the bathroom.

Regulation, similarly, can be great. But having too much can lead to more harm than good, including blocking the new housing we so desperately need.

Of course, concerns such as environmental protection are important. But there are plenty of other cumbersome requirements and processes we can start to chop down. And as our American authors point out, there’s an abundance of other ways, including investment in the energy transition, we should be looking at to preserve our environment (that’s a column for another time).

Treasurer Jim Chalmers said last month that Abundance had been a wake-up call for the left and that a roundtable on productivity he is organising in August would tap into the ideas outlined in the book. Just how much the government will get out of its own way as it pushes to build 1.2 million homes by 2029 is unclear.

If I manage to buy my own shoebox flat, I’ll join the army of Australian home owners whose wealth is almost entirely locked away in housing, and whose self-interest will therefore be a continued surge in home prices. That cannot coexist with the vision to make housing more affordable. I probably won’t be a direct winner of the government’s long-term Abundance agenda. But I hope by the time I’m at dire risk of forgetting the struggle of buying my first home, the government has done what it takes to make it easier for the generations to come.

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Someone's doing the heavy lifting, and it's not the government

By MILLIE MUROI, Economics Writer

In the goldmine of numbers unearthed this week, we learned a lot of things. Among them: that gold diggers (not those ones) stepped up while the government stepped back.

Treasurer Jim Chalmers celebrated, declaring like a proud dad that he had deflated the fiscal floaties on our economy. The private sector is now “doing the heavy lifting” he said: in other words, private businesses and households are now swimming rather than sinking.

Now, the gold producers are a bit of a special case. While uncertainty – driven by the volatility in the world at the moment – hurts most businesses, those dishing out gold (or digging it up) tend to do well. Why? Because when people get scared, they gravitate towards gold, driving up its value

Our economic growth – in real gross domestic product (GDP) – came in more sluggish than expected by many economists, at 0.2 per cent. And while the “national accounts” for the March quarter seem to mark a turning point in some ways, they don’t factor in the wrecking ball (also known as Donald Trump) which largely swung into action in April.

Nonetheless, there are some nuggets of hope to sift out from the figures.

First, the government is no longer the star player on the economic pitch. Over the past two years, public spending on everything from infrastructure to electricity bill relief has kept the economy from grinding backwards (sometimes going forward by as little as 0.1 per cent).

That’s not the case any more – or at least, our politicians aren’t propping up the economy to the same degree they have been.

The federal government still spent a bit more in the three months to March than it did in the previous three months. But the growth in its spending was slower, as its outlays on social benefits programs such as Medicare and the National Disability Insurance Scheme dropped.

State governments, meanwhile, actually reduced spending in the first three months of the year, with most winding back energy bill relief as cost of living pressures have eased.

Some of the pullback in spending growth – especially nationally – is probably thanks to the budget’s “automatic stabilisers”: government payments such as unemployment benefits which naturally fall as the economy improves (and rise when the economy is in the doldrums and people are losing their jobs).

But the flat government day-to-day spending and fall in government investment spending (partly due to the completion of projects such as Sydney’s metro) certainly seem to suggest they’ve become happier to sit on the bench and let private businesses and households make more of the runs. This fall in public demand ended up subtracting the most from overall quarterly growth since 2017.

The overall picture is also a bit murky after quarterly growth in the economy slowed to the lowest rate since March last year. And GDP per person – generally a better measure of our living standards than total national GDP – slipped 0.2 per cent in the March quarter.

While it’s welcome news that private businesses and households seem to be regaining some of their gusto, neither were close to shooting the lights out.

Household spending is one of the most hotly anticipated pieces of the puzzle because Australian households' spending accounts for more than half of the country’s GDP. That means what consumers choose to do has an outsized effect on our economy.

Turns out we went more gangbusters on holiday sales last year than economists were expecting, but then decided (perhaps as our New Year’s resolutions) to rein in our spending.

We still splurged on big events including going to see artists such as Billie Eilish. And a warmer-than-expected summer (as well as the pullback in energy bill relief) meant that – whether we liked it or not – we had to splash more cash on keeping ourselves cool. That all contributed to household spending climbing 0.4 per cent.

But when it came to spending that isn’t strictly necessary, our purse strings tightened a bit, suggesting we’re still treading cautiously.

Partly thanks to Donald Trump’s unpredictability spooking us, we decided to squirrel away a bigger chunk of our income – even though we were generally earning more – in the March quarter. In fact, the saving ratio (which measures the proportion of our disposable income we stow away for a rainy day) climbed from 3.9 per cent to 5.2 per cent: the highest it’s been since 2022.

Another factor feeding into that higher saving ratio was Ex-Tropical Cyclone Alfred in Queensland which led to the government (and insurance companies) paying out to those affected – who in turn, ended up stashing a good portion of it away.

Investment by the private sector took the podium when it came to the part of GDP with the strongest growth, rising 0.7 per cent in the March quarter. That was largely thanks to a stronger appetite for investment in dwellings, including building houses and making renovations, perhaps helped along by the first cut to interest rates in nearly four years.

Businesses were also eager to sink money into manufacturing projects and more digging – not just for gold but for other minerals, too – contributing to the growth in private investment.

Net trade – exports minus imports – meanwhile, weighed down our overall growth, wiping 0.1 percentage point from the March quarter. While both imports and exports fell, the drop in exports was bigger. Production and shipments of coal and liquefied natural gas were disrupted by severe weather which, together with subdued growth in the number of international students and less spending per student, drove down Australia’s exports.

The implications of all this data for the Reserve Bank – and thus for all of us – is not immediately clear. The national accounts are always a delayed set of data (a good deal can change in the following three months), and there are signs of both continued weakness and of renewed strength in the economy.

The step back in public spending will probably make it easier for the Reserve Bank to drive forward with another rate cut next month – especially given it was close to slashing rates by 50 basis points at the last meeting, price pressures seem to have faded into the background, and growth is crawling along at snail’s pace.

With unemployment laying low, the inflation dragon tamed, and the private sector stepping up, there are glimmers of hope that Chalmers and the RBA have struck gold in our economic management. Now it’s about safeguarding the spoils by pulling up productivity and getting economic growth well off the ground.

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Young people will decide who's the next PM

By MILLIE MUROI, Economics Writer

By now, it’s no secret that young people are the biggest voting group. While no demographic fits neatly into either the Labor or Coalition camp – or completely agrees on any given issue – it will be a relief for many young Australians to know they are more than an afterthought this election.

Neither party has been exceedingly visionary, but as Prime Minister Anthony Albanese and Opposition Leader Peter Dutton jet around the country in a final scramble to cement their messages in the dying days of the election campaign, one leader will be tossing and turning far less when they hit the hay every evening.

For the past few decades, voters have tended to be “rusted on” to the major parties. That is, there wasn’t much anyone could do to change their minds in the weeks leading up to election day – and “safe” seats, where one party was practically guaranteed to win, were actually safe.

But young people have thrown a spanner in the works. Not only do Gen Z (born after 1996) and Millennials (born between 1981 and 1996) make up more than 40 per cent of the national vote – outnumbering Baby Boomers for the first time – but they are increasingly pulling their support from the major parties.

The Greens have taken a bigger bite of the youth vote in recent elections, and the Australian Electoral Study – which has surveyed voters after every election since the mid-1980s – has found support for the major parties more widely has dropped to the lowest level it's seen.

That may also be thanks to the rise of independent or teal candidates who have offered platforms more in tune with issues such as climate change – especially hurting the Coalition in wealthier, inner-suburban electorates.

While there is diversity within the youth cohort, there are certain trends, shared experiences and grievances that have clearly shaped the major parties’ campaigns – and which will ultimately determine the result of the election.

Issues such as housing affordability, climate change and cost of living consistently dominate polling among young people.

With house prices continuing to slip out of reach of younger Australians (which their parents and grandparents are also seeing secondhand), both Labor and the Coalition have put housing policies front and centre in their campaigns.

Their demand-side policies are not especially helpful for dampening house prices because they increase the number of people bidding for a new home (and therefore push up house prices). Labor has guaranteed to allow all first home buyers to buy a place with a 5 per cent deposit, and the Coalition has promised to allow first home buyers to withdraw some of their superannuation and reduce their income tax by deducting their mortgage payments.

But these policies are short-term carrots that both parties know will appeal to first home buyers – many of whom are younger.

After facing a red-hot rental market, wage growth failing to keep up with the growth in everyday prices, and a pandemic which could have a long-term drag on their career progression, a seemingly lower hurdle to enter the housing market may be welcome for many young people.

It’s also more immediate than policies aimed at increasing supply, such as the Housing Australia Future Fund aimed at building thousands of homes, and the Coalition’s less direct promise to invest in housing infrastructure such as water, power and sewerage systems, which are more effective, longer-term responses. Both Labor and the Coalition know voters do not have the patience to wait (more) years to be able to crack into the housing market.

While cost of living has persistently been the number one issue for voters, one party has taken the extra step when it comes to easing pressures for young people. Labor’s promise, for example, to wipe 20 per cent off student loans, is a compelling proposition – especially for recent graduates who have racked up record levels of debt amid higher course fees. It’s a policy that has strong support – even among young Coalition voters.

The risks for Labor, of course, include the tendency of voters to “punish” or kick out whoever is in power during hard times, even if those hard times had little to do with the government, and the possibility of young people – who tend to be more progressive – choosing to back minor parties such as the Greens who have pushed for more radical policies such as capping rents.

While there’s recent evidence some young men are leaning more to the right and holding more conservative views than older generations, young people are, for the most-part, “issues-based” voters, meaning action on top offenders: housing affordability, climate change and cost of living are crucial to gaining their support.

Albanese, while arguably lacking extraordinary charisma, speaking ability or policy ambition, has done the basics well. He has relentlessly hammered home announcements on urgent care clinics, affordable medicines, childcare and fee-free TAFE, many of which matter to many, but especially young people.

By contrast, the campaign period has revealed some of the cracks and weaknesses in the Coalition. While their fuel excise cut is undeniably one of the policies with the strongest cut-through this election, they have been slow in releasing their costings, backflipped on their policy to end work-from-home for public servants, and only spoken about their nuclear policy when prodded.

Meanwhile, Albanese has consistently demonstrated he has a solid grasp of how systems, from health to roads and renewables, work – focusing on small improvements but never backing down or straying from his core policies.

Albanese has also connected more effectively in the social media space where young people tend to reside, at least much more than older generations. Dutton’s refusal to engage with influencers has narrowed his reach, while missteps such as his declaration that he would prefer to live in Sydney’s Kirribilli House over Canberra’s Lodge, did the rounds.

While Albanese has made his fair share of mistakes and neither leader has a natural flair for social media, the prime minister’s quips, vulnerability when speaking about his mother, and ability for banter may have put him in a stronger position on platforms such as TikTok where a sense of authenticity and personality are key to connecting with users, most of whom are younger.

Young people may have an appetite for bolder reform and back in more independents and minor party candidates this election, but Albanese will almost certainly secure a second term as prime minister. While there’s no one-size-fits-all approach to attracting young voters, doing the “ordinary” well is probably enough to get Labor across the line.

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Home truths: housing policies are mainly for show

If you think this sounds twisted, it is. The best thing about the two sides’ various promises to help young people afford to buy their first home is the way it has provoked the nation’s economists to rise in condemnation of those schemes’ wrongheadedness. They look like they’ll help, but most of them are more likely to end up making homes less affordable rather than more.

And the parties know it. They know it because their economic advisers wouldn’t fail to make sure they knew. All economists know it, but this is the first time so many have come out and said it, joining independent economist Saul Eslake, who’s been saying it at every opportunity for decades.

You can say housing affordability comes up at every election, but not like it has this time. This time, both sides are giving it top billing. They know they can’t hope to win the election without having promises that seem to be helping would-be home owners. It’s just a pity they aren’t more sincere about it.

So what’s changed? The voting population. For years, the pollies have known that the number of home owners far exceeded the number of people hoping to become home owners. So the number of voters who love seeing the price of homes continually rise far exceeds the number who hate it.

But now, for the first time, the great lump of Baby Boomers is outnumbered by the Millennials and Generation Z. The Boomers are probably the last generation where most were able to clamber aboard the homeownership merry-go-round. And they did that a long time ago.

It’s the younger generations who’ve had the least success in dreaming the Great Australian dream. And guess what? They’re pretty peed off about it.

A recent survey by money.com.au found that housing affordability and rental stress were the dominant concerns for Australians under 40.

And my guess is that their encounter with the bank of mum and dad has helped the older generation see that ever-rising house prices is a two-edged sword. Actually, this intergenerational recycling has been one of the factors helping to keep house prices high and rising.

Why? Because by helping young people afford otherwise unaffordable prices, it’s helping keep them high, rather than falling until they became affordable. And when some new government scheme helps many people afford the unaffordable price, that tends to bid the price up, too.

If prices do rise, the beneficiaries of the scheme end up being not the buyer of the home, but the seller. And that’s been the great attraction of such schemes: they look like they’re helping first home buyers while they are actually benefiting existing home owners. Just what the politicians want.

Most people view such schemes purely from their own perspective: if the government gives me a leg-up, I’ll be able to afford this high price. That would be true if you were the only person helped. But when many people like you are helped at the same time, only the highest bidder wins.

Just about all the schemes proposed by the two parties have this effect. The Coalition’s earlier announced scheme, to let first home buyers take up to $50,000 out of their super and use it towards a deposit, also helps many rival bidders.

If there were lots of similar houses available at that price, then everyone could buy one without affecting the price. But that’s the point: the reason the price is so high is that there aren’t many available relative to the demand.

The Coalition’s new scheme is to grant eligible first home buyers a tax deduction on the interest they pay on their home loan for the first five years, provided they buy a newly built home. This may allow people to borrow more – provided the banks allow it – but just making the monthly mortgage payments easier to afford will add to the demand for homes.

And this is the scheme that frightens economists the most. It could be much more costly to the budget than expected if many more people take it up. It could be hard politically for a Dutton government to chop it off after five years. And it heavily favours high income-earners.

Labor’s huge expansion of a scheme that allows people to buy a place with a deposit of only 5 per cent because the government gives them free “lenders mortgage insurance” is a kind of negative gearing for owner-occupiers rather than investors. But it, too, would add to the demand for homes.

It boils down to this: when the demand for homes exceeds the supply of them, rising prices are inevitable. The only way to slow the rise is either to reduce demand (say, by removing the tax breaks for investors), or to increase the supply of homes by building more of them.

Labor’s scheme to spend $10 billion building 100,000 new homes across the country in a joint arrangement with the state governments on a non-profit basis and with purchases restricted to first-home buyers, is the only scheme that would increase supply and put some downward pressure on prices.

The Coalition claims its interest-deductibility scheme would add to supply because it’s limited to people buying new homes. Sorry, not true. If increasing the demand for housing quickly and easily led to an increased supply of them, house prices would not have risen to the heights they’re at today.

No, our very problem is that state government zoning requirements and an inefficient housing industry stop supply from increasing much in response to increased demand.

Labor’s scheme with the states should overcome the zoning problem, but our years of neglecting to train enough building apprentices will need a lot of fixing and could yet greatly limit the building of more homes.

There’s no quick and easy solution to our housing affordability crisis. And almost all the schemes the two sides are waving about are just for show.

But Labor does get the need to free up the supply of homes. Unfortunately, that message is yet to get through to the Coalition.

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Our home-building industry is going nowhere fast

You may think that a newly built home or unit looks pretty swish. But what no one’s noticed until now is that our home building industry is clapped out. Gone to pot. It’s going nowhere fast. While most of our industries have improved greatly over the past 30 years, the housing industry hasn’t. If anything, it’s getting worse.

As I’ve mentioned before, now that the ever-worsening affordability of home ownership has reached a crisis point, our politicians – federal and state – have finally started taking affordability seriously.

It’s such a tough problem it will only be solved by fixing all the bits of the system that aren’t working as they should. So, for the first time in living memory, it occurred to someone – someone in Treasury, I suspect – that maybe we should take a quick look at the home building industry to make sure it’s ticking over OK.

The recent report by the Productivity Commission has revealed that the musclebound blokes in shorts and work boots – and their bosses – have yet to be introduced to the lovely Miss Productivity. They drive the latest monster SUV utes – all with names like the Bronco, the Wrangler, the Grunt, the BigOne and the BallScratch – but that’s where modernity ends.

According to the report, our home builders have clocked up “decades of poor performance”. It examined the whole building process, from site preparation and project management to the installation of fixtures and fittings.

Over the past 30 years, the productivity of the industry’s workers – the value they create per hour of work – has fallen by 12 per cent. This takes account of the increase in the size and quality of new homes over the decades. And this while all our other industries’ productivity improved by 49 per cent. The report calculated that, had all our industries performed as badly as housing, our average income would now be about 40 per cent lower than it is.

Of course, the industry’s productivity differs by housing type. Productivity in the building of actual houses has fallen by 25 per cent, whereas productivity in higher-density housing – building townhouses, units and apartments – has increased by 5 per cent.

The report admits the many reasons it’s difficult to make housing construction more efficient. For a start, you can’t pump out houses the way you produce cars on an assembly line. Each one has to be built at its own location; locations can be different, and there are many different sizes and styles of houses.

As well, house building is sequential; everything has to be done in a certain order. You can’t polish the floors or put down the tiles until the roof’s on, for instance. So, if there’s a delay in completing a particular stage, all the subsequent stages have to wait.

Then there are significant safety and quality issues to be considered. The plumbing must be of a standard that doesn’t disrupt the sewerage system; the electrical work must minimise the risk of electrocution; in these days of global warming, homes should be built with energy efficiency in mind; does its location mean the place needs to be cyclone-proof? And that’s before you get to houses built on a floodplain.

Next, unlike most industries, there’s been little pursuit of economies of scale. Housing construction is one of our least concentrated industries. The combined market share of the largest four firms is only about 12 per cent. Not exactly Woolies and Coles or Qantas and Virgin, eh?

The average firm in the home building industry has only two employees. Everyone’s a subcontractor. Even so – or perhaps because of this – the industry struggles to attract and retain skilled workers. Apprenticeship commencements and completions have stagnated. Training pathways can be restrictive and inflexible. And the higher density housing builders have to compete for skilled workers with big construction companies building expressways and suchlike.

What stands out, the report says, is the housing industry’s lack of innovation. Few of the industry’s bosses put much effort into searching out and trying new ways of doing things.

To be fair to the industry, however, it does have to do battle with a huge load of government regulation of its affairs. The local government development and construction approval process can be cumbersome, with inexcusable delays in issuing approvals.

Regulation can stretch the timeline for an apartment complex or new housing estate out to 10 years or more, the report says. Often, only a small part of this is time to actually do the building work.

The report identified four ways that government regulation reduces productivity. First is the sheer volume of regulation, with all three levels of government getting in on the act. The national construction code – which should have been a great means of reducing overlap and overload – has been allowed to grow to more than 2000 pages.

Second, approval processes can be unduly slow and poorly co-ordinated. Third, there can be inconsistencies between the levels of government, creating unnecessary confusion, duplication and delay.

And finally, excessive, unthinking regulation can discourage and even prevent innovation, deterring businesses from finding better ways to do things.

Now, I’ve long been sceptical of business lobbies demanding we get rid of “red tape”. Too often, what they’re really saying is, “I should be free to make my own decisions on how safe this needs to be and how it will affect the neighbours and the natural environment. I need to create jobs and make profits now, and we’ll worry about our grandkids later.”

But by the same token, government departments are monopolies and misbehave accordingly, making unreasonable demands and putting through approvals in their own sweet time.

So, if we want a lower-cost, faster-finishing building industry, we must wake up and put a huge amount of effort into rationalising our regulation of the industry while insisting the bureaucrats get approvals processed without unnecessary delay. Never again should we ignore the industry’s performance.

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The nation is finally coming to grips with home affordability

Right now, the prospect of much improvement in being able to afford a home of your own isn’t bright. We don’t look like solving the problem any time soon. But I’ve been watching and writing about the steady worsening in housing affordability for the best part of 50 years, and I’m more optimistic today than I’ve ever been.

Why? Not because we’ve got the problem licked – and certainly not because mortgage interest rates will soon be coming down – but because it’s become so bad no one can go on ignoring it. At every level, from governments at the top to mums and dads and angry young people at the bottom, we’re realising that house prices just can’t be allowed to keep going up and up forever.

For the first time in my experience – and probably the first time since the housing crisis immediately after World War II – all of us are realising something must be done to turn things around. Politicians, treasuries, economists and parents are coming to grips with the problem. We’ve begun thinking hard about all the factors contributing to the problem and the many things that will need to change.

Until now, people have focused on fixing this favourite factor or that one. Now we’ve finally realised the problem is multi-faceted and needs to be attacked at every level from every angle. There’s no magic bullet.

Although affordability has been worsening for decades, the disruptions of the pandemic and its lockdowns – closing our border then reopening and having people flock in – have made the problem acute as well as chronic. It’s the same in other rich countries, but I bet ours is worse.

For many years, politicians on both sides and at both levels of government expressed sympathy for “first home buyers” but didn’t really care. That’s because voters who own their home far outnumber those who don’t, and home owners love seeing the value of their home going higher and higher.

But now home owners are joining the dots and realising their growing wealth comes with a major drawback. Their kids can’t afford a home without big withdrawals from the bank of mum and dad. Why is this a smart way to run the country?

People complaining about housing affordability tend to blame the federal government. In fact, it’s the state governments that have most influence over how many new homes are built, where they’re located and whether there’s enough higher-density housing in the parts of cities where people most want to live.

That’s why the Albanese government’s National Housing Accord with the states is a big advance. That’s true even though their agreement to deliver 1.2 million new dwellings over the five years to mid-2029 is running well behind schedule and may not be achieved.

The accord is important because it represents both levels of government accepting responsibility for housing affordability and being willing to co-operate in making progress. The time-honoured way to get the states pulling their weight is for the feds to pull out their chequebook. Which they have.

You don’t need an economics degree to see that if house prices keep rising it must be because the demand for homes is growing faster than their supply. That’s true, but it’s not that simple. For one thing, if all the extra houses are on the city’s fringe, people who want to live closer in will still be bidding up the prices of the better-located houses and units.

That’s why a big part of the deal with the states is for them to permit more better-located higher-density apartments. This switch of emphasis from doing things to reduce the demand for housing (by ending the tax breaks that help investors outbid first home buyers) to increasing the supply of well-located homes is a big step forward in the thinking of politicians, econocrats and economists.

But we’ll probably need to reduce demand as well as increase supply – so don’t think you’ve heard the last on “negative gearing”.

And don’t assume that if the NIMBYs have been beaten back and permission given for more middle-ring high-rise, they’ll start springing up in a few months’ time. Now the experts have their minds focused on housing, we’ve realised our home-building industry isn’t in tip-top shape. When demand surges, the businesses are much better at whacking up their prices than at building a lot more homes.

Right now, the industry’s discovered it can’t get the tradespeople it needs to expand its production. That’s why, at present, it’s building fewer homes than usual when it should be going flat-chat. We’re told it has lost a lot of its tradespeople to the construction of transport and other infrastructure for … the state governments.

Well, maybe. But my guess is the industry long ago gave up ensuring it was training lots of apprentices because they’d be needed in the next building boom. Similarly, the bureaucrats issuing visas to skilled immigrants don’t seem to have worried much about how their decisions would affect the building industry.

In the post-war years, state governments built and owned thousands of homes rented to people in need. But that went out of fashion decades ago, and now they own little social housing. Changing that will be another part of what’s needed to get housing affordability under control.

Finally, the Reserve Bank. The modest falls in mortgage interest rates we’ll see this year and next are unlikely to do anything lasting to improve housing affordability. When you’ve got a shortage of homes, making it a bit cheaper to borrow just allows someone to win the auction by paying more than the other bidders.

The Reserve has always denied that its use of the interest rate lever to keep inflation low has any lasting effect on housing affordability. But this assumes its ups and downs never cause borrowers to do crazy things for fear of missing out. Maybe the Reserve will need to change too.

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Think the measurement of inflation's a bit off? You're probably right

By MILLIE MUROI, Economics Writer

If you’ve ever looked at the latest inflation figures and thought to yourself it doesn’t really reflect the ballooning or shrinking prices you’ve been paying, you’re probably right.

Like most measures of our economy’s health, the consumer price index (CPI) – our main inflation gauge – is only a rough estimate of what’s happening to prices. It tracks changes in the costs of a vast range of things but also skips over some key items we spend on.

This week, we learned prices at the end of last year were climbing at the slowest annual rate since March 2021 at 2.4 per cent (a much more reassuring figure than the 7.8 per cent we were seeing two years ago). But if you feel like the prices you’re paying are moving to a different tune, they probably are.

The index, measured by the Australian Bureau of Statistics, basically tracks the change in the price of a typical “basket” of goods and services that we, as households, consume. Think: a big shopping trolley that carries a lot more than what you’d find in a supermarket. Sure, it includes eggs and fruit, but it also includes things like school fees, specialist visits and subscriptions to your favourite streaming platform.

Of course, you probably don’t spend on the exact same things, or buy the exact same amount, as people on the other side of the country – or even your neighbours – which is why the inflation measure isn’t a perfect fit for specific households.

The CPI is based on the average spending habits of everyone (well, at least those living in the capital cities). Then, based on this data, the bureau gives different “weightings” – a measure of an item’s relative importance in the total basket – to different items and categories. Things we spend a lot of our money on – like housing costs and food – get a bigger weighting in the index, meaning any changes in prices in those categories will shift the dial more when it comes to the final inflation figure.

Since the things we tend to spend on change over time, the bureau frequently updates these weightings.

The first ever “basket” in 1948, for example, put the proportion of our spending on food and non-alcoholic beverages at nearly one third, with dairy products alone taking up nearly a quarter of our food budget. Women’s clothing, meanwhile, accounted for about 10 per cent of our total spending. Combined with spending on men’s attire at nearly 5 per cent, our total spending on clothing back then took a bigger bite out of our budget than the 12 per cent we used to spend on housing!

Today, food and non-alcoholic drinks account for 17 per cent of the typical household’s spending, and both dairy products and women’s clothing just 1 per cent each – the latter being largely thanks to the rise of mass-produced and cheap imported garments. It’s perhaps little surprise that the biggest share of our spending is now on housing at more than 20 per cent, while transport, including our spending on cars, burns about 11 per cent (transport spending was measured through fares – such as the price of train tickets – which took up about 6 per cent of the typical household budget in 1948 before cars became widespread).

So, how does the bureau know what we’re spending on?

One way is through the household expenditure survey, which is conducted roughly every five years and gives the bureau an indication of how much we’re spending on different goods and services. It’s the reason why, for many years, the CPI weightings – only changed about every five years. Now, as collecting information has become easier and more digital, the weightings are updated every year and rely on various sources including retail trade and transaction data.

The bureau gets its pricing data by monitoring the prices of thousands of products. It looks for this information through everything from websites, to supermarket and department store data, as well as pricing data it receives from government authorities, energy providers and real estate agents.

Combining the pricing and weighting data gives us the consumer price index which is released in its complete form every three months. Since September 2022, the bureau has also published a monthly CPI reading, although the goods and services measured each month tend to alternate, giving us an incomplete picture of what’s going on.

As we’ve talked about, the CPI isn’t an accurate measure of our cost of living, although we all assume it is.

A better measure is the bureau’s “selected living-cost indexes” which break down changes in the cost of living for different types of households. Working households, for example, saw their annual living costs rise by 4.7 per cent last September quarter, while self-funded retirees only experienced a 2.8 per cent increase.

That’s mostly because different household types tend to splash cash on different things. Self-funded retirees and age pensioners might, for instance, spend slightly more on health, meaning any price changes there may bump their cost of living more than it would for working households.

But by far the biggest reason for the difference between working households and older cohorts is that working households are more likely to have a mortgage they are paying off. This means changes in interest rates – which are included in the selected living cost indexes but not the CPI – have a bigger impact on their overall cost of living.

It’s also one of the biggest shortcomings of the CPI. In the early 1990s, the Reserve Bank started using interest rates to target inflation: a practice that’s now become very familiar to us all. But later that decade, the bank asked the bureau to remove interest rates from the consumer price index. Why? Because the bank didn’t want the instrument it was using to control the rise in prices — interest rates — to be included among the price rises being measured. Your instrument should be separate from your target.

Instead, since 1998, the CPI has measured housing prices through changes in components such as rents, the cost of building new homes, and the cost of maintenance and repairs. But that means for the roughly one third of Australian households with a mortgage, the CPI is not a very good measure of the price pressures they are facing.

While the CPI is a rough estimate of the cost of living pressures we’re facing, if you feel like the pinch you’re feeling is harder or softer than the latest figures suggest, you’re probably right.

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The Australian economy is behaving strangely

By MILLIE MUROI, Economics Writer

Australian consumers are usually the engine room of the economy. Every extra dollar we spend drives economic growth higher – and there’s so many of us that we’re usually a force to be reckoned with. In the three months to September, though, something strange happened.

We had more income to splurge but shied away from spending much of the extra cash according to national accounts data from our number-crunchers at the Australian Bureau of Statistics this week. Instead, a bigger share of our pay made its way into piggy banks, mattresses and bank vaults.

Households, while still accounting for nearly half the economy, took a back seat. So, how did the Australian economy still manage to step up?

The size of our economy can be measured in three ways: output (the amount of goods and services we pump out), income (the amount of profit pocketed by businesses and pay that has flowed into households) or by looking at all the spending that happens.

That last one includes money spent by the government, businesses, foreigners (buying up our exports) and our heavy lifters: households. Since the mid-2000s, household consumption has accounted for at least half the size of our economy. It’s only this September quarter that household spending dropped to less than half of gross domestic product (GDP).

Does that mean households are struggling? Well, it depends on how you look at it.

If people’s shopping receipts are any indication of their living standards, you could argue things are looking pretty stagnant. Household spending came in flat at 0 per cent growth.

And, in fact, if we look at spending per household, we’re grinding backwards. Why? Because our population has been boosted by migration. While overall household spending has stayed flat in the September quarter, we’re individually spending less than we were earlier in the year. And that’s after we saw total household spending growth turn negative the previous quarter.

Growth for the wider economy has also been slipping into reverse when we account for population growth. Looking at economic growth per person, we’ve been sliding backwards for nearly two years.

Back to households, though. It’s not all bad news. We actually spent a touch more on discretionary goods and services – things we may not need but are nice to have, such as new clothing and recreation. Spending on essentials, meanwhile, fell. We spent more on things such as rent and staying healthy, but dished out far less on electricity and gas thanks to a warmer-than-expected winter, and partly thanks to the government’s energy bill relief that took the heat out of our energy bills.

Household disposable income – the amount we have left over to spend or save after paying our taxes – also grew. Not only did our income (at least collectively) grow by 1.3 per cent, mainly thanks to pay rises, many of us also had our taxes slashed, too. Stage 3 tax cuts came into play in July, pushing down the income tax we paid during the quarter by 3.8 per cent. Those who had money stashed in the bank also got a boost from interest rates on deposits.

But we didn’t do what a lot of economists (and the Reserve Bank) expected us to do – or at least not to the degree they thought we would. Instead of going on a spending spree with our extra cash, we squirrelled a lot of it away. It’s common for people, especially when they’re worried about their finances, to take a while to work out how they are going to spend their extra money.

The household ratio of saving to income – which tells us how much of our disposable income we stowed away for a rainy day – grew from 2.4 per cent last quarter to 3.2 per cent. Since our incomes grew, but we weren’t spending any more than we were in the June quarter, the slice of our pay going towards savings increased.

The saving-to-income ratio is still much lower than the 10 to 20 per cent we were at during the pandemic when the rivers of stimulus payments gushed in, and our spending options were locked down, but it has been climbing back from a low of 1.5 per cent in March last year.

Of course, the money we save ends up sitting idle – at least while it stays in our coffers. We don’t spend it, so it doesn’t flow back into businesses, and doesn’t stimulate the economy to grow.

But our decision to save a lot of the money we got to keep thanks to tax cuts doesn’t explain the slow – but positive – upward crawl of the economy. If households didn’t spend any more than they did in the previous three months, then how did the economy still manage to expand?

A big driver of our economic growth was spending – not by households or businesses – but by the government. It contributed 0.6 percentage points to growth in the three months to September. Part of this was thanks to a pick-up in public investment by state and local governments on infrastructure projects such as roads and renewable projects.

But a big chunk of the government spending was on cost-of-living relief, such as the energy rebates, which basically just shifted what would have been paid by consumers to cook and heat their homes, to the government’s shopping list. It meant overall government spending hit a near-record-high share of the economy at more than 28 per cent.

Since overall economic growth only came in at 0.3 per cent (notably lower than the 0.5 per cent economists had been expecting), government spending made the difference between our economy shrinking and treading water.

There were also other factors with a smaller impact on growth, including a slight uptick in the construction of new homes, which pushed up private investment spending. There was also a fall in inventories (generally stock held by companies) and net overseas trade – as imports fell and exports grew – which contributed 0.1 percentage points to GDP.

Although the economy’s usual star player – households – spent less than expected in the September quarter, there are signs things will pick up in the final three months of the year. For one thing, retail trade picked up 0.6 per cent in October, even before all the major discounts started kicking in last month, coaxing customers (and their wallets) out for Black Friday and Cyber Monday.

So, how does this position the Reserve Bank?

While economic growth and household spending growth are running below its forecasts, the bank has previously said the level of demand – how much we’re spending now as opposed to how fast our spending appetites are growing – is still too high unless we improve how much (or how efficiently) we can produce things.

It’ll take more weakness in spending, or more progress on slamming a lid on inflation, for the Reserve Bank to start cutting rates. So far, Australian households – and their spending – seem stuck in the holding pen.

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Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

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Why the big parties' professed housing fixes won't work

I’m sorry to tell you, but it’s becoming increasingly likely that next year’s federal election campaign will feature a fight over which side has the better policies to end the housing crisis. Why is that bad news? Because neither of the major parties’ proffered solutions would do much good.

The Albanese government wants to introduce two schemes – Help to Buy and Build to Rent – but these are being blocked in the Senate by the opposition and the Greens. If they’re not passed, Labor will go to the election claiming it has the policies that could fix the high cost of housing, but is being stopped by its evil, anti-housing opponents.

The Liberals claim Labor’s schemes are no good, but that their own proposal, Super for Housing, would do the trick. As for the Greens, they’re blocking Labor’s schemes because, they say, they’re too small to make any difference, and Labor needs to agree to their proposals to make that difference. What proposals? To end negative gearing, spend a lot more on building social housing, and limit how much rents can be increased in any year.

The Greens are selling themselves as the party for renters. This is no bad thing. The two big parties have never worried much about renters, even though they make up about a third of households.

The real problem is that the big parties’ schemes don’t stand up to close examination. They’re designed to look bigger and more helpful than they really are.

The term housing “crisis” is misleading. Both sides of politics have sat back for decades, happily watching house prices rise faster than household incomes.

When you go back to basics, the cause of rising house prices is that the demand for properties is growing faster than the supply of them. The only policies that slow the rise in prices are those that either add to the supply of homes or reduce the demand for them.

So when governments pretend to help first-home buyers with grants or reduced stamp duty, they’re neither adding to supply nor reducing demand. They’re just making it easier for some people to pay the high price. Get it? They’re actually helping keep the price high. And if they help enough buyers, they’re probably pushing prices a bit higher.

This is what’s wrong with both Labor’s Help to Buy scheme and the Libs’ Super for Housing scheme. Labor’s scheme would involve the government giving eligible homebuyers up to 40 per cent of the home’s purchase price, but retaining ownership of the same proportion of the home’s value.

Whenever you sold the house, you’d have to buy out the government’s share, which by then would be a much higher amount than you were originally given. This is a condition that hasn’t appealed to many people when some of the states have offered similar schemes. There haven’t been many takers.

Labor’s scheme would be offered to a maximum of 10,000 buyers a year. This may sound a lot, but in an economy of 27 million people, it ain’t.

The deeper problem, however, is that, as with previous straight-out grants to first-home buyers, it doesn’t reduce the price of homes but, rather, makes them a bit easier for a few lucky people to afford. By doing so, it actually adds to the demand for homes, so putting upward pressure on prices.

The Libs’ objection, however, is that Labor’s scheme smacks of socialism. Their rival plan, Super for Homes, would allow eligible buyers to add to their home deposit (and thus to the amount they could borrow), by withdrawing up to $50,000 from their superannuation savings, provided it was no more than 40 per cent of their super balance.

One objection to this is that it wouldn’t do much to help younger homebuyers, since they wouldn’t have accrued much super. But, again, the more serious criticism is that the scheme would actually add to the demand for homes and so help push prices higher.

By contrast, Labor’s other scheme, Build to Rent, would offer special tax concessions to those big concerns that built new blocks of apartments and rented them out. So it would – in principle, at least – help by adding a bit to the supply of homes.

And, to be fair to the government, its already-implemented deal with the state governments, where it’s giving them big bucks to facilitate the building of 1.2 million new homes over five years, would – in principle – add to the supply of homes, particularly higher-density housing in the parts of capital cities where people most want to live.

Why will we be increasing the supply of homes only “in principle”? Because, right now, the nation’s home building industry can’t expand without more tradespeople. It’s short of workers because a lot of them have gone off to work on the states’ big infrastructure projects, but also because for years the industry has been saving money by not training enough apprentices.

When you’ve allowed homes to become ever-harder to afford over many decades, a few showy schemes won’t suddenly fix the problem.

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All the reasons house prices will keep rising until we wake up

Contrary to popular opinion, the cost-of-living crisis will pass. But the housing crisis will go on worsening unless politicians – federal, state and local – try a mighty lot harder than they have been.

The cost of home ownership took off – that is, began rising faster than household incomes – about the time I became a journo 50 years ago, and is still going. Even the (unlikely) achievement of Anthony Albanese’s target of building 1.2 million new homes by 2029 probably wouldn’t do more than slow the rate of worsening affordability for a while.

You’d think there must be some kind of limit to how much harder it becomes to afford a home of your own, but considering how long it’s been running, it’s difficult to see just how it will come to an end.

It’s the advent of the Bank of Mum and Dad that’s making the rise in prices seem self-sustaining. Housing prices keep rising, but this makes the existing home owners wealthier, giving them greater wherewithal to help their kids afford the higher prices, which keeps those prices rising, rather than falling back to a level young people could afford without a special leg-up.

Small problem: we end up with a country divided between those born into the wealthy, home-owning class and those born into the class where generation after generation has never been able to afford to own the home they live in. Is that the Australia we want to live in?

How on earth did we allow housing prices to rise faster than household incomes for the past five decades, with little reason to hope this gap won’t get ever wider?

By allowing the slow but steady decline in the rate of home ownership – which began in the mid-1970s – to be a problem we’d worry about later. Or worse, to be a problem the politicians only pretended to care about.

I call this the Howard Effect. John Howard takes the credit because he’s the polly who most clearly hinted at the political class’s true lack of concern about declining home ownership.

He was always repeating the line that he had yet to meet a home owner who thought rising house prices were a bad thing. Get it? The number of happy home-owning voters far exceeded the number of unhappy young couples unable to join the club.

But the rise of the Bank of Mum and Dad has changed this calculus. It’s proof of home owners’ dawning realisation that rising house prices are a two-edged sword. They’re not a problem only if you don’t give a crap about your kids.

It’s probably housing’s big part in the cost-of-living crisis that’s finally broken the dam of politicians’ disinterest in housing affordability. What is of lasting significance about the Albanese government’s efforts to speed up the rate of home-building is its shift to seeing blockage on the supply side of the housing market as the key to progress.

Until now, those seeking to do something about the decline in home ownership have focused on the way special tax breaks and pension exemptions add unhelpfully to the demand for housing.

But the misguided notion that its plan to reform negative gearing and the capital gains tax discount played a significant part in Labor’s loss of the 2019 federal election put paid to demand-side solutions.

The great strength of Albanese’s plan is its focus on reforming local government planning and zoning restrictions on the supply of medium and high-density housing in our capital cities.

Tax and pension problems are the responsibility of the feds. Planning and zoning restrictions are the responsibility of the states. As ever, the only way for nationwide state-level problems to be fixed is for the feds to take the lead. And, as ever, the only way for the feds to get the states to make changes is to flash the federal chequebook.

The state governments – NSW in particular – are making genuine efforts to overcome the long-standing NIMBY resistance to higher-density housing.

Great. But if you think fixing the density problem will stop housing prices rising faster than household incomes, you’re deluding yourself. Just as fixing negative gearing wasn’t a magic answer, nor is fixing density.

No problem as big and long-lasting as declining home ownership could be anything other than multi-faceted. Yes, we need to fix the supply side. But yes, we need to fix the demand side as well. And there’s more to the supply side than density, just as there’s more to the demand side than negative gearing.

Last week’s report of its Review of Housing Supply Challenges, by the NSW Productivity Commission, should be read by people in all states.

The report says local councils should lift their game in reducing the inordinate delays in accepting development approvals and in reducing unreasonable demands on builders.

I think government agencies are monopolies and, like all monopolies, they rarely resist the temptation to put their own convenience ahead of their customers’ needs.

As federal Treasury’s sermon on the housing challenge in this year’s budget papers also made clear, the NSW report notes that part of the problem is the inadequacy and inflexibility of our housing industry.

It’s simply not capable of expanding to meet the surge in demand for homes – something that, I suspect, doesn’t worry it greatly. It’s content to respond by “rationing by [higher] price”, a mechanism I explained in last week’s column.

But the NSW report says the housing industry simply doesn’t have enough tradespeople to increase its production. Workers have been lost to the major construction projects, thanks to the surge in state government spending on infrastructure.

This is no doubt right, as far as it goes. It’s certainly true that state governments would do better (and cheaper) if they timed their investment spending to fit with the ups and downs of private sector major construction spending.

But I think the ability to meet shortages of skilled workers simply by bringing workers from overseas when you need them has led the industry to neglect training sufficient apprentices to meet future needs.

Neither this report nor Treasury’s budget sermon acknowledges another possible supply-side problem, the one highlighted by the economists’ great alternative thinker on housing, Dr Cameron Murray. He argues that the developers keep house prices rising by limiting the release of land to fit.

When you look at the broader causes of ever-rising house prices, even the Reserve Bank doesn’t escape responsibility. The central bankers have always argued that housing prices are a consequence of the interaction of the demand for housing and its supply, so nothing to do with them.

Again, that’s true as far as it goes. But it sidesteps the more behavioural possibility that whacking interest rates up and down engenders an “irrational” FOMO – fear of missing out – that helps keep house prices rising when rates are falling and even when rates are rising and could rise further.

If so, that’s yet another reason why the economists need to come up with a better way of limiting demand than just screwing young people with big mortgages.

There’s more to ever-rising house prices than has ever crossed the minds of most economists.

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The pollies have twigged that our crazy housing game can't go on

Last week, a fairly ordinary place in our street, similar to ours, sold for $4.7 million. I suppose I should be congratulating myself on how well I’ve done in the capitalist game. And it’s only fair since I’ve “worked hard all my life”. In truth, all we’ve done is pay the exorbitant price of $180,000 for our place, then hung around for 40 years. This makes sense? Surely, this crazy game can’t keep going onward and upward forever.

It’s now been two weeks since Treasurer Jim Chalmers delivered his budget, but I’ve only just realised its main content is not the one-year $300 electricity bill rebate we’ve obsessed over, it’s the evidence the government has finally accepted our housing system is dysfunctional and must be fixed. The budget papers include a long statement spelling out what’s wrong with housing with a candour I’ve not seen before.

The hard truth is that, until now, the pollies on both sides have only pretended to care about how hard the young were finding it to afford a home of their own. Why? Because the number of voters who own a home – whether outright or still with a mortgage – greatly exceeds the number who’d merely like to become a homeowner. As John Howard used to say, he’d never heard any homeowner complain about the rising value of their property.

All the things pollies do in the name of helping first-home buyers – such as cutting stamp duty on the purchase price – don’t actually help, and probably aren’t intended to. When they claim to be helping you afford the high price, they’re really helping to keep it high. If they helped you and no one else you’d be advantaged. But when they also help the people you’re bidding against, it’s actually the seller who benefits.

It’s the same with the Bank of Mum and Dad. The more parents help their kids afford the high prices – as I have – the higher those prices will stay. Again, the sellers benefit.

When the value of the oldies’ homes just keeps going up, this constitutes a transfer of wealth from the younger to the older generation. The Bank of Mum and Dad transfers some of the wealth back to the youngsters. The losers, however, are those kids who didn’t have the sense to pick well-off parents.

But what makes me think the Albanese government has seen the light?

Well, for a start, it makes more political sense than it used to. Not only are younger people having trouble affording their first home, they’re being hit with big jumps in rent thanks to an acute shortage of rental accommodation.

The budget statement admits that the median price of dwellings in the eight capital cities has more than doubled since the mid-noughties. So have advertised rents. It now takes more than 11 years to save a 20 per cent deposit on a house.

Politicians have been favouring the old at the expense of the young for decades, but the young are getting restive. Labor has more than its share of the votes of young adults. It risks losing those votes if it doesn’t start delivering for the younger generation.

Labor sees that house prices and rents are rising because the supply of homes has failed to keep up with growth in the population. Part of the reason for this is what the statement admits has been a “long-term, chronic under-investment in social housing”.

Why all these frank admissions? Because the Albanese government has decided to do something big to ease the problem. The budget announced new measures worth $6 billion which, added to those already announced, amount to a $32 billion plan to deliver 1.2 million new, well-located homes in the five years to June 2029. This would be equivalent to a city the size of Brisbane.

As with so many of our problems, the feds have most of the money needed to fix the nation’s housing, but the actual responsibility for housing rests with the states and even local government. The plan’s attraction is that it’s been agreed with the states and includes monetary incentives for them to co-operate.

The words “well-located homes” are code for many of them involving medium and high-density housing in the capital cities’ “missing middle”. It requires the states to take on their local government NIMBYs (see monetary incentives above).

It would be wrong, however, to see this plan as the simple solution to a housing system that’s been performing poorly for decades. It will be some years before it makes much difference, and experts have questioned whether so many new homes can be built in just five years.

It’s an advance to see the new emphasis on improving the system’s ability to supply more houses, but the vexed question of fixing the distortions to demand caused by misguided tax concessions remains to be faced.

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Treasury tells all: how the housing market is so stuffed up

Would you believe that our ever-rising house prices are a sign there’s something badly wrong with our housing market? Would you believe our housing arrangements are worse than in the other rich countries?

Well, I would when that’s what Treasury is admitting in the annual sermon it tacks onto the budget papers. This year it’s about meeting our housing “challenge”.

In a well-functioning economy, its industries can respond to the increase in demand for their good or service by increasing their supply without much delay. Of course, it takes a lot longer to build a new house or apartment than it does to churn out more ice-creams or haircuts.

But, even so, our housing industry has been too slow to respond to the increased demand for housing. This comes from our rising population which, thanks to continuing high levels of immigration, has grown faster than most of the other rich countries.

Figures from the Organisation for Economic Co-operation and Development, a group of mainly advanced economies, show that our number of dwellings per 1000 people increased only from 403 to 420 between 2011 and 2022. This compared poorly with most other countries.

In 2011, our level of housing supply was just 92 per cent of the OECD average. And by 2022 it had fallen to 90 per cent. This was behind countries such as Canada, the United States and England.

Our completions of new private dwellings reached a peak of more than 200,000 a year in 2018-19 but have since fallen to about 160,000 a year. This has left us with an acute shortage of properties available to buy or rent.

Nationwide, the number of homes being offered for sale has fallen since 2015, while the number offered for rent has been falling since early 2020.

Speaking of renting, Treasury says the rental market is considered to be in balance – meaning renters have little trouble finding a place and landlords have little trouble finding a tenant – when the vacancy rate is about 3 per cent. In cities such as Sydney and Melbourne it’s now down to about 0.5 per cent. Ouch.

Not surprisingly, when demand grows faster than supply can keep up with, prices rise. The rise in the cost of newly built homes, and the cost of renting, have contributed significantly to the general cost-of-living crisis.

So, why has our housing industry become so slow to respond to increased demand? Treasury says the causes are “multifaceted, complex and affect all stages of the housing construction process, including all levels of government and industry”.

One way to improve the market’s response to greater demand is to accelerate the construction process. But Treasury says that completion times for apartments, townhouses and detached houses actually worsened by 39 per cent, 34 per cent and 42 per cent respectively over the 10 years to June 2023.

Calculations (or, if you want to sound more scientific, “modelling”) by a federal government agency says that, over the next six years, the nation’s existing unmet demand will never be satisfied unless completion times are speeded up. In six years’ time, we’ll still have a backlog of about 39,000 dwellings.

Treasury says the expectation that churning out homes faster will help to lower house prices is supported by empirical research. One study found that those OECD countries that built more housing over the 15 years to 2015 experienced lower real growth in house prices.

Another study showed that adding an extra 50,000 homes a year for a decade could reduce house prices by up to 20 per cent.

So, what can be done to increase the housing industry’s annual output? Treasury says planning and zoning restrictions can limit the speed at which land is made available.

Delays in approving development applications by local councils can be excessive. I think councils and government departments are monopolists and, like all monopolists, they take advantage of the lack of competition.

Private sector monopolists whack up their prices and don’t worry about the quality of the service they provide. Public monopolists make you jump through hoops that aren’t strictly necessary, and they fix your problem in their own good time.

I wonder whether, over all these years, those outfits have ever had much pressure on them to lift their game. If that changed, I’m sure we could get more homes built per year.

Treasury says average times for the approval of development applications vary by state, with Victoria and NSW experiencing the longest waiting times early this month of 144 and 114 days, respectively.

It shouldn’t surprise you that Treasury wants housing to be delivered in well-located areas where the demand is greatest.

Dense development in the “missing middle” of major cities, where households can reside closer to jobs in areas with higher quality amenities and infrastructure, has been limited by planning and zoning restrictions and slow release of infill land, Treasury says.

Global supply constraints and price shocks on imported building materials associated with the pandemic have added to the cost of construction, driving up the price of newly built homes. Although prices aren’t rising as fast as they were, they haven’t fallen back.

Shortages of building labour have also increased the prices of newly built homes and slowed the pace of construction. The growth in non-dwelling construction activity has drawn labour away from home building. The productivity of labour in construction has not improved since the early 2000s.

The industry blames these shortages on the drop-off in rates of skilled migration during the pandemic. But I wonder if the deeper problem is that the former ready availability of imported labour tempted the industry to save money by failing to train as many apprentices as they should have.

So, what’s the Albanese government doing about this mess? It’s finally grasped the nettle and is spending big – $32 billion, including $6 billion in this month’s budget – to “address historical underinvest in the housing system” and build 1.2 million new, well-located homes. We’ll see how they go.

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We need to talk (sense) about immigration

It’s a safe bet there’ll be much talk about immigration between now and the next federal election, due this time next year. Peter Dutton has seen to that. Trouble is, much of it will just be hot air, much of it will be misleading and much will reflect the vested interests of the person doing the talking.

And some of it will reveal us at our worst: our tendency to blame incomers for all our ills. The more ignorant among us will shout abuse at some poor soul they see on the street whose clothing or skin colour looks different.

But none of that says our immigration policy isn’t a legitimate subject for sensible debate. Personally, I’d like to see it a lot lower.

You know strange things are happening when the leader of the Liberal Party says he wants to slash immigration. The Libs are, and have always been, the party of high migration.

But they’ve fallen on hard times with the loss of so many heartland seats to the teals, and Dutton figures his best hope of winning is to pick up seats in the outer suburbs, where their social class says people should vote Labor, but their social values give them greater affinity with the conservatives.

It’s because many immigrants gravitate to the outer suburbs that the locals find it easier to blame them for traffic congestion and other overcrowding, rather than governments’ failure to build enough infrastructure.

Ordinary Australians have always tended to think there’s been too much immigration. But the Liberals support it because it’s what business wants. The easiest way to increase profits is to sell into a growing market. Consider what you’d want if you were in the business of building new homes.

In recent times, Labor has supported high immigration too, mainly because it doesn’t want to get offside with business.

Almost all economists support strong immigration. I suspect that’s because their obsession with economic growth makes them susceptible to the fallacy that bigger is always better. Not if it comes at the expense of quality.

The economists do have one sensible point to make. Many people fear the migrants will take all the jobs. But the dismal scientists refute this. The newcomers and their families add about as much to the demand for labour to produce more goods and services as they add to the supply of workers.

All this – the gap between voters’ doubts about immigration and the pressure on governments to keep it coming – helps explain what seasoned political observers know: the pollies professed enthusiasm for cutting immigration is a lot stronger during election campaigns than it is after an election’s become a receding memory.

As for Dutton’s proffered solution, it doesn’t amount to much and would do little to fix the problems he claims he wants to fix. By the same token, the government’s claims that his plans would hasten the end of the universe are exaggerated.

Here’s a tip. Any pollie banging on about what they intend to do to the “permanent migration” program either doesn’t know what they’re talking about or, more likely, is pretty sure you don’t. What affects the economy’s workings is not permanent migration so much as “net overseas migration”, which is arrivals minus departures (ignoring people coming or going on short visits).

This actually went negative when we closed our borders during the pandemic, but soared after we reopened them. Net migration exceeded 520,000 in the year to June 2023, and over the year to this June may be as much as 400,000.

This huge surge is what’s causing the fuss. A lot of the swing is explained by incoming overseas students, which the universities will tell you is a wonderful thing. It’s one of our biggest export earners, and the unis have come to rely on this income to fund much of their research work.

I have some sympathy for them. Successive federal governments have made them more dependent on overseas students by using this as an opportunity to limit the support the unis get from the budget.

Even so, it seems clear that the inflow of students needing somewhere to live has contributed to the recent acute shortage of rental accommodation and added to the jump in rents.

The Albanese government wants to see a big drop in net migration and, to this end, is talking about imposing caps on how many overseas students the unis can admit.

The unaffordability of home ownership is a good issue for the election campaign, but Dutton is drawing a long bow in linking it to immigration. Homes have become harder to afford over several decades for various reasons. The recent immigration surge won’t have made much difference.

What’s true is that the more people we let in, the more capital investment – in the form of homes, business equipment and public infrastructure – we need to meet their needs. When this investment fails to keep up with the growth in the population, problems arise and the benefits to the economy that the advocates of high immigration have promised don’t happen.

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Why fixing negative gearing would be a positive for our kids

Life wasn’t meant to be easy for our politicians – which is as it should be. Poor old Anthony Albanese. No sooner has he got away with breaking his promise on the stage 3 tax cuts than he’s besieged by people demanding more tax reform.

Trouble is, they all want different things, and every one of them could cost him votes as fat cats who stand to lose some tax break join forces with the opposition to run a great scare campaign, claiming it’s ordinary voters who’d be hit.

Despite the many things wrong with our tax system, the two big parties have wedged themselves into a corner on reform. Neither side’s game to do anything for fear of what the other side would say.

But when, unsurprisingly, polling showed that most people approved of Albanese’s decision to switch about $7 billion a year of the tax cuts away from those at the top and give them to those in the middle and bottom, the would-be reformers swarmed out of the woodwork.

First out was the (Big) Business Council, terribly worried about the lack of investment and the need for greater productivity. I’ll check their claims another day.

Then came two of our best economists, Professors Ross Garnaut and Rod Sims, proposing to bring back the carbon tax, only bigger and better. As I wrote last week, it’s a good idea.

But the one to watch, another old favourite, is the talk of finally doing something to curb the negative gearing of investment properties, which really took off 20 years ago after John Howard decided that the capital gain on property and other investments should be taxed at only half the rate applying to income from actual work.

A rental property is negatively geared when so much of the cost of buying it is covered by a loan rather than your own savings that the interest bill and other expenses exceed the rent you earn.

Why would anyone deliberately set up a business to run at a loss? Because the loss is deductible against your income from work. On a small investment of your own money, you sell the property a few years later at a big capital gain, only half of which is taxed. Not bad, eh?

Former Treasury secretary Dr Ken Henry reminds us that the rental property sector’s deductions are now so huge they exceed the rental income, making it not a net taxpayer. Taken together, all those landlords contribute nothing but are being subsidised by the mug workers.

What should worry Albanese is that the Greens are now pushing negative-gearing reform as part of their efforts to rebrand themselves as the party that cares about renters and first-home buyers.

If Labor doesn’t start showing it wants to improve the daunting prospects facing the younger generation, it risks losing its share of the youth vote to the Greens. The Libs needn’t worry, they’ve lost most of their share already.

Some years ago, the Grattan Institute proposed allowing landlords’ rental losses to be deducted only from other “passive” income, not wage income. There must be some recognition that capital gains shouldn’t be taxed at their full, inflated amount, so the 50 per cent discount should be cut to 25 per cent.

Another approach would be to allow losses to be deducted against wage income only if the investment property was newly built. This would overcome the objection that investors usually buy established homes, thus adding to the demand for homes without adding to their supply, and so pushing prices up out of reach of first-home buyers.

Now, the business people who see themselves as losing from the restriction of negative gearing – the real estate agents and home building companies – always claim it would do great damage to renters and home buyers alike. Don’t believe it. When economists try to estimate the likely effects, they find them to be small. Average house prices would fall by just 1 or 2 per cent, they say. So much for the death and destruction.

But these sums underestimate the likely benefit to young buyers. While the fall in the average price of all houses and units may be small, that’s because most house prices would be unaffected. Entry-level homes, the kind bought by mum-and-dad investors and first-home buyers, would become more affordable because those prices would fall by a lot more.

What’s more, a recent study finds that the share of households who own their home rather than renting it would increase by a huge 4.7 percentage points. Nor would it surprise me if, in practice, the effect was greater than the economists’ figuring suggests.

Even so, fixing negative gearing is no magic answer to housing affordability, and the Albanese government’s efforts to increase the supply of housing, particularly in the parts of cities where people prefer to live, is another part of the answer.

Albanese and Treasurer Jim Chalmers say they have no plans to change negative gearing, but that’s what they said about changing the stage 3 tax cuts – until they were ready to move.

And with the Greens using negative gearing as a bargaining chip in the Senate, progress is far from impossible.

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Why Albanese's housing solution will help, but only a bit

If you rank our many economic problems in order of importance, the affordability of housing comes second – admittedly, a distant second – only to the need to limit climate change. And the good news is that Anthony Albanese’s latest deal with the premiers represents progress. The feds have made a start by offering the premiers a bag of money if they do the right thing.

What climate change and housing have in common is their great effect on the future wellbeing of our children. With housing, the fundamental problem is that our present arrangements favour those who already own a home (or two) at the expense of those who’d like to own one.

Those who are well set up in the property department love seeing the inexorable rise in their wealth. The more unaffordable their home becomes, the happier they are. Because there are double the number of home owners to would-be home owners and other renters, politicians on both sides have gone for decades professing great concern about the plight of would-be first home buyers while doing little or nothing to help them.

This means housing is becoming hereditary. Young people can afford to buy a home only with help from their parents, but parents can help only if they’re well-established home owners. Without so much help from parents, home prices would have to fall to make homes affordable.

So, the Bank of Mum and Dad has become an essential part of the system, but it works to keep home prices unaffordable to those without access to that bank.

Renting used to be seen as a temporary, transitory state. This is why state governments have never worried much about the treatment of tenants and have easily yielded to pressure from landlords to give them the upper hand.

It’s always been the case that poor people rented all their lives, but now the poor and the students are being joined by middle-class couples who’ve got on with having kids rather than waiting until they can afford a place. We’re acquiring a large underclass of people who’ll never manage to afford a ticket in the home owners’ club.

Until now, the problem of “housing affordability” has been seen as a problem for would-be home owners. Last week, the focus shifted to rent affordability and the poor treatment often dished out to renters.

Economically, this has happened because, at a time when the price of everything we buy is rising faster than our wages, rents have been positively shooting up. Why? Because, suddenly, there are so few vacancies; because the number of people needing to rent almost exceeds the number of properties for rent.

Politically, the spotlight has turned on renters because the Greens have been taking votes from the two majors by billing themselves as the party for renters.

Meanwhile, the nation’s economists, whose usual focus has been on the way tax and pension rules have pushed up home prices by adding unduly to the demand for homes, have reached a new consensus that it’s really the inadequate supply of homes that’s the problem.

Right now, that’s obviously true – especially in the supply of rental accommodation. But if you look at our record over recent decades, supply hasn’t had much trouble keeping up with demand, so it’s not the main thing that’s pushed prices so high.

So, on the face of it, Albanese’s new agreement with the premiers to facilitate the building of 200,000 more homes than the previous target of 1 million extra homes, over the five years from next July, doesn’t seem such a big deal. Most of those probably would have been built anyway.

What’s different is that they have to be new “well-located” homes. Well-located means “close to existing public transport connections, amenities and employment”.

Get it? “Well-located” is code for medium- and high-density housing. Most people want to live close to the centre of capital cities – or at least close to good public transport to the city – and economists now believe it’s council zoning restrictions on high-rise that’s done most to drive up home prices “where people want to live”.

So, premiers Daniel Andrews and Chris Minns have signed up to more high-rise. But agreeing to targets is one thing; delivering them is quite another. The premiers will meet plenty of objections, obstructions and foot-dragging.

That’s the other thing that’s different about Albanese’s new deal. He’s offering $3.5 billion in “performance-based funding” to those states that achieve more than their share of the original 1 million target. Each of the further well-located 200,000 homes their state’s builders produce will bring the premier a $15,000 bonus.

You’ve heard what they say about getting between a premier and a bag of money, so let’s hope it works. Ditto the premiers’ promises to reach a national agreement requiring landlords to have reasonable grounds for eviction, limiting rent increases to once a year, and phasing in minimum quality standards for rental properties.

When it comes to getting premiers to agree on harmonising regulations, I wouldn’t hold my breath – unless there’s more money on the table, of course.

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Why you should and shouldn't believe what you're told about inflation

If you don’t believe prices have risen as little as the official figures say, I have good news and bad. The good news is that most Australians agree with you. The bad news is that, with two important qualifications, you’re wrong.

Last week the officials – the Australian Bureau of Statistics – reminded us of a truth that economists and the media usually gloss over: the rate of inflation, as measured by the consumer price index, can be an unreliable guide to the cost of living. Especially now.

But first, many people who go to the supermarket every week are convinced they know from personal experience that prices are rising faster than the CPI claims. Wrong. Your recollection of the price rises you’ve noticed at the supermarket recently is an utterly unreliable guide to what’s been happening to consumer prices generally.

For a start, only some fraction of the things households buy are sold in supermarkets. The CPI is a basket of the manifold goods and services we buy – some weekly, some rarely.

Apart from groceries, the basket includes the prices of clothing and footwear, furnishings, household equipment and services, healthcare, housing, electricity and gas, cars, petrol and public transport, internet fees and subscriptions, recreational equipment and admission fees, local and overseas holidays, school fees, insurance premiums and much more.

But the main reason no one’s capable of forming an accurate impression of how much prices have risen is our selective memories. Have you noticed that no one ever thinks prices have risen by less than the CPI says?

That’s because we remember the big price rises we’ve seen – they’re “salient”, as psychologists say; they stick out – but quickly forget the prices that have fallen a bit. Nor do we take much notice of prices that don’t change. We don’t, but the statisticians do – as they should to get an accurate measure of the rise in the total cost of all the stuff in the basket.

Sometimes the price of the latest model of a car or appliance has risen partly because it now does more tricks. Because they’re trying to measure “pure” price increases, the statisticians will exclude the cost of this “quality increase”.

My son, who watches his pennies, was sure the eggheads in Canberra wouldn’t have noticed “shrinkflation” – reducing the contents of packets without changing the price. No. This trick’s intended to fool the unwary punter; it doesn’t fool the statisticians. It counts as a price rise.

But now for the two reasons the CPI can indeed be misleading. The first is that averages can conceal as much as they reveal. Remember the joke about the statistician who, with his head in the oven and his feet in the fridge, said he was feeling quite comfortable on average.

The most recent news that, according to the CPI, prices rose by 0.8 per cent in the three months to the end of June, and 6 per cent over the year to June, was an average of all the households – young, middle-aged and old; smokers and non-smokers, drinkers and teetotallers, no kids and lots, renters, home buyers and outright owners – living in the eight capital cities.

Now note this. Economists, politicians and the media tend to treat the CPI and the “cost of living” as synonymous. But if you read the fine print, the bureau says that, while the CPI is a reasonably accurate measure of the prices of the goods and services in its metaphorical basket, it’s not, repeat not, a measure of anyone’s cost of living.

Why not? Partly because it does too much averaging of households in very different circumstances, but mainly because of the strange – and, frankly, misleading – way it measures the housing costs of people with mortgages.

The cost of being a home buyer is the interest component of your monthly payments on your mortgage.

But that’s not the way the CPI measures the cost of home buying. Rather, it’s measured as the price of a newly built house or unit. Which makes little sense. Many people with mortgages haven’t bought a new home.

And even those people who did buy a newly built home, did so some years ago when house prices were lower than they are now.

The bureau changed to this strange arrangement a couple of decades ago. Why? Because the Reserve Bank pressured it to. Why? Well, as you well know, the Reserve uses its manipulation of interest rates to try to keep the annual rate at which prices are rising, as measured by the CPI, between 2 and 3 per cent on average.

But, after it had adopted that target in the mid-1990s, it decided that it didn’t want the “instrument” it was using to influence prices – interest rates – to be included in the measure of prices it was targeting, the CPI.

So, the bureau – unlike other national statistical agencies – switched to measuring home buyers’ housing costs in that strange way. And the bureau began publishing, in addition to the CPI, various “living cost indexes” for “selected household types”.

The main difference between these indexes and the CPI is that home buyers’ housing cost is measured as the interest they’re paying on their loans, not the cost of a newly built house. But, of course, different types of households will have differing collections of goods and services in the basket of things they typically buy.

So, whereas the CPI tells us that prices rose by 6 per cent over the year to the end of June, the living cost indexes show rises varying between 6.3 per cent and 9.6 per cent.

Among the four selected household types (which between them cover about 90 per cent of all households), the type with the highest price rises was the employees, whose costs rose by 9.6 per cent overall.

That’s mainly because most of the people with mortgages would be is this category. Mortgage interest charges rose by 9.8 per cent in the quarter and (hang onto your hat) by 91.6 per cent over the year.

At the other end of the spectrum, supposedly “self-funded retirees” had the lowest living-cost increase of 6.3 per cent – mainly because almost all of them would own their homes outright.

Then come age pensioners, with cost rises of 6.7 per cent – few with mortgages, but some poor sods renting privately.

And finally, “other government transfer recipients” - those of working age, including people on unemployment benefits, on the disability pension and some students. They’re costs are up 7.3 per cent. Some of these would have mortgages, most would have seen big rent rises.

What this proves is that using interest rates to control prices makes the cost of living worse before making it better.

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