Productivity Commission, First Home Owners’ Scheme, MPs Superannuation, Interest Rates, Dollar, Housing Affordability, Point Nepean – Press conference, Melbounre

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Productivity Commission, First Home Owners’ Scheme, MPs Superannuation, Interest Rates, Dollar, Housing Affordability, Point Nepean – Press conference, Melbounre



Press Conference

Thursday, 18 December 2003

SUBJECTS: Productivity Commission; First Home Owners’ Scheme; MPs Superannuation;

Interest Rates; Dollar; Housing Affordability; Point Nepean.


I welcome the release today of the Productivity Commission’s Draft Discussion

on Home Ownership. It is a very welcome and useful contribution to understanding

this issue and what is the drivers behind the housing market.

Home ownership in Australia remains one of the highest levels in the world,

and the overall trend in the number of first homebuyers has been broadly consistent

over the last decade, and since the mid 1990s has actually trended upwards.

That is, on trend terms, home ownership has been a little higher for first homebuyers

since the mid 1990s.

There has obviously been a very large rise in prices in Australia since the

mid 1990s and the Productivity Commission finds that the factors behind that

are low interest rates, availability of credit, strong job creation, which has

led to more people having the incomes which can support mortgages and support

higher mortgages. And many people during that period have taken the opportunity

to actually increase the standard of their housing.

Notwithstanding that, the Productivity Commission believes that in the last

couple of years, prices could have risen more than expected and it actually

sees some sign of cooling off now coming into the market. That is, that supply

might be now in some sections of the market greater than demand and that in

the investor area of the market, very low yields may now be indicative of a

price correction.

I welcome the fact that the Productivity Commission has also looked at the

supply side of this market. It believes that the supply responses are quite

slow. That is, when demand picks up, it’s quite slow in getting additional supply

into the market with land release policies and it has made some recommendations

in that area as well, as to how land could be released quicker, how some of

the disincentives that apply when people are buying or selling, mainly stamp

duties, operate in this area to get supply and demand out of whack. And it has

raised a couple of issues there which I think State Governments could look at

and very seriously examine.

This is a draft discussion paper, the Productivity Commission will take additional

representations before it brings down its final report. But it is a good report.

It sheds a lot of light and I think it explodes a lot of misconceptions about

what has been happening in the housing cycle and the Government will very carefully

consider it.


Would you be prepared to consider means testing First Home Ownership Grant?


Well, the First Home Ownership Grant was not introduced as a grant to get people

into the market. It was introduced as an offset for GST. That is why it was

made available to everybody, because everybody does pay GST. That is why it

has been operating in that particular way. It wasn’t introduced as a low income

assistance measure. It was introduced as a cash compensation measure. But, everything

that the Productivity Commission has put on the table the Government will consider.

I am not ruling any options in, I am not ruling any options out, at the moment.


What about negative gearing? Doesn’t that encourage investment by restricting

supply for first homebuyers?


I think as the Productivity Commission found, and it is very interesting on

that point. There’s a lot of people think that negative gearing is unique to

the property market. It is not. Negative gearing applies to equity markets and

other investments. All negative gearing means, is, if you are making a loss

on one investment, you can set it off against income in other areas. And the

Productivity Commission says, if you want to look at negative gearing, you have

got to look at a lot more than housing and the property market. You will have

to look at business generally. And I think it is a very astute comment. The

Productivity Commission does find, and I think there is something in this, that

one of the reasons why a lot of investment went into property in the last couple

of years, is that equity markets were weak. That is, just as Australia’s economy

was strengthening, more people had more income and interest rates were low,

and they had the capacity for investment, equity markets were weak. That is

one of the reasons why people invested more in property markets than equity

markets. But having said that, I would urge you to look at the yields that now

apply on investor housing. They are very low. And what that is telling you,

I think, is that if you want to be an investor in housing and you are looking

for rental yields, it is not a very good return at the moment. Because as the

Productivity Commission says in this report, no quick fixes here, no magic bullets.

The housing market is very much tied to the overall state of the economy and

that when supply and demand get out of whack, it starts to correct itself like

in other areas of the economy and there may be signs that that is now happening.


Mr Costello, on a separate issue, Mark Latham has flagged possible changes

to MPs superannuation. Do you think politicians can justify their current super

arrangements given that they are slightly out of step with the community standard?


Well, this Government put in place preservation, the same preservation rules

for MPs that were elected at the last election, as apply in the community generally.

And that has been the traditional complaint. If Mr Latham has any specific proposal

other than that he should put it up and we will carefully have a look at it.


Would the Government consider changing the structure if they were, if the Opposition

were to put up something similar?


Well, the Opposition hasn’t put up anything. It is just another example of

thinking aloud. But if they put up something, of course we will carefully analyse

their policy. But the Government has already introduced the same preservation

requirements for MPs that were elected at the last election. And that has been

the major complaint.


Housing affordability has fallen to I think to a level of the middle of `90s.

Do you have any encouragement for those who are looking to buy a home?


Well this is where I think, I think this is a very interesting report, the

Productivity Commission Report. What does it find? First of all it finds that

the number of first homebuyers is not declining. It has been pretty stable over

the last decade and it has actually trended slightly upwards since the mid 1990s.

Secondly, what does it say, it says, as interest rates came down, people started

borrowing more. You would expect that. That is one of the reasons, by the way,

why you reduce interest rates, so people can borrow more. They took the opportunity

to either buy bigger homes or more desirable homes. So, the low interest rate

environment actually led to a better standard of housing. You had to pay more

for a better standard of housing, but it enabled more people to get a better

standard of housing. Thirdly what does it then say? Well it says that, obviously,

as your prices start rising, if they become unsustainable, you get corrections

in the market. And we are beginning to see corrections in the market. So, I

think it has brought forward a whole lot of rationality to this whole debate,

that this is a market like other markets, it is influenced like other markets,

it corrects like other markets and it responds to both supply and demand like

other markets. And if you are asking me about the price question, I would agree

with what the Productivity Commission has found. I believe that there is a cooling-off

going in the market at the moment.


Mr Costello would you see a further need for interest rate rises?


Well I am not going to comment on the future direction of interest rates. But

I will say this, that the interest rates that are slightly over 7 per cent for

a standard variable mortgage rates, are still very low by historical standards.

And you can see here in one of these graphs, I think figure 3, as mortgage rates

came down, because people were paying less, they were able to borrow more. And

many people took that as an opportunity to move, to get a better standard of

housing, maybe to do a renovation. And it actually led to increasing living

standards, and one of the main reasons for house prices going up, is that living

standards in Australia have been supported by good strong jobs growth.


Mr Costello the dollar is heading towards US 75 cents (inaudible) do you see

any problems next year if the currency continues to go up?


Look, it would help our exporters if the dollar were lower. And during the

period of 2000-2001 when the dollar was, at some stages, as low as 50 cents

against the US dollar, that was a great thing for our exporters. And a lot of

Australians say to themselves well the dollar has risen, it has risen 30 per

cent this year, that is good if we are going on an overseas holiday. But we

don’t particularly want people to go on overseas holidays we would like them

to stay and holiday in Australia, keep the Australian tourism industry strong

and we would like to see our exporters have help commensurately. So I acknowledge

that this currency has risen markedly over the course of this year, 30 per cent,

and that has been pretty tough for our exporters.


Do you agree with the Commission that stamp duty should be abolished and if

so, how should the States be compensated?


Well, the Commission says that stamp duty is producing an enormous windfall

for State Governments, and it has. Low interest rate environment, strong job

creation, house prices have gone up, States have produced a windfall. And I

do agree that if stamp duty were lower, people would have the opportunity to

take advantages in the market, it would be easier to trade up or down and of

course State Governments, of course, have got to manage their own budgets. This

idea that State Governments have got to be compensated for cutting its taxes.

State Governments can actually cut taxes you know. They can actually as sovereign

governments control both revenues and expenditures. And I wouldn’t fall for

the proposition for a moment that a State Government can’t cut its taxes, or

it has to be compensated by somebody to do so. This is all part of economic



What about Federal Governments? Can they cut taxes?


Yes. The Federal Government cut taxes in the May Budget by $2.4 billion this

year and by $10 billion over the forward estimates, that was income tax cuts.

And we always keep an eye on the tax levels, believe me.


Are there any plans at all to wind up the First Home Owners Scheme?




Do you agree with the Commission’s view that a lot of the grants are going

to people that either don’t need the money or would have bought a house anyway,

in the not too distant future?


Well, it was introduced as a compensation measure for GST. That is, that purchasers

would pay GST on housing, all purchasers who purchase new housing, and all purchasers

who purchased established housing would be purchasing in a market where prices

have risen. And it was introduced as a compensation measure. It was not introduced

as a targetted assistance. It was introduced as a compensation measure. Now

I have said before, we will keep all of these options on the table. But that

is how the First Home Owners Scheme got there.


Treasurer, can I just ask you about Point Nepean? The National Parks Association

is questioning why the Federal Government couldn’t have come up with the $10

million to set the area into a park rather than relying on a anonymous benefactor

that has come along. Why couldn’t the Government come up with the money (inaudible)?


I think a benefactor came along because a benefactor wanted to see a particular

need met. And as I understand it, it is for families that are suffering. And

I think people like that, are wonderful people. I don’t think anybody should

disparage them for doing that. I think we ought to welcome their contribution,

we ought to acknowledge the wonderful thing that they have done. And not only

will it help kids that are suffering and their families, but it will find a

use for these buildings. Now we can find a use for the buildings that are there.

They can’t be pulled down. They have to be maintained and if one of the uses

can be to support children and families in distress that is a wonderful use.

Thanks very much.