Five weeks before the election, political focus groups are putting health and education spending at the top of their list of concerns.
Labor is promising improved funding for both, with as yet uncertain means of paying for those promises.
The Coalition, in turn, is accusing Labor of unfunded promises hoping to distract attention from its own lower health and education spending.
In fact, this ‘major’ point of difference is based on fairly modest sums of money.
Labor has pledged $3.4 billion over four years to keep prices down in the pharmaceutical benefits scheme, protect Medicare safety net provisions and unfreeze bulk billing rebates for medical practitioners.
And it has pledged $2.9 billion more than the Coalition over four years for the Gonski education reforms.
Put together, those reforms are worth a third of one per cent of the $1.9 trillion in government expenditure forecast over those years in the 2016 budget papers.
And quite frankly, many Australian households should be worried by much scarier numbers relating to their biggest monthly expense – a roof over their heads.
A very quiet elephant
Housing affordability is the elephant in the room, and one that affects all levels of Australian society.
Young renters are forgoing consumption spending much more than their parents’ generation to save huge deposits for their first homes.
Existing mortgage holders are paying back record principal components of their home loans.
And even older Australians are having to shell out tens, if not hundreds of thousands, to help their offspring into a home of their own.
Meanwhile economists in the department of Treasury and the RBA can’t see a problem with this state of affairs, for two reasons.
Firstly, while the debt secured against housing has ballooned, the size of the assets it is secured against has ballooned too – in strict accounting terms, those record-debt-holders are also sitting on record paper profits.
The obvious hole in that logic is that when a price correction occurs, as it did in across western Sydney in 2004, the debts of homeowners stay the same but the paper profits evaporate.
The second reason Treasury and the RBA boffins sleep so soundly at night is that the cost of servicing debt has fallen thanks to record low interest rates.
So while household debt as a percentage of disposable income has risen from about 60 per cent to 180 per cent in the past 25 years, the cost of interest paid is only about 8.5 per cent of disposable income. (See the RBA’s chart showing these two metrics here.)
The obvious hole in that reasoning is that one of the main reasons for paying off a home over 25 or 30 years is that renting or paying mortgage in retirement smashes a huge hole in one’s retirement income.
That’s why the costs of both interest repayments and principal repayments must be looked at together.
The principal concern
To illustrate this problem, consider an auction I attended out of curiosity last month, in a suburb 12 kilometres west of Melbourne’s CBD.
A three-bed house on a very small block was advertised at $430-$460,000, and like so many dwellings was sold for way over the reserve – about $560,000.
To buy that place, a couple of first homebuyers would have to come up with a deposit of $112,000, buying costs (including stamp duty) of $30,000, and would then borrow about $450,000 from a bank – let’s say as a 25-year mortgage.
Assuming the buyers don’t want to pay rent/mortgage in retirement, they will not only have to spend $1112 on interest at today’s record low rates, but will have to pay $1677 in principal payments every month for the life of the loan.
That’s $2789 to get out of renting, in an area where similar properties rent for about $1600 a month – and for which the same couple would not have to pay maintenance bills, council rates or house insurance.
If the Australian economy improves in a few years’ time, monthly repayments will increase too – to $3080 at 5.5 per cent, or $3386 at 6.5 per cent.
It’s worth remembering that the RBA cash rate between the year 2000 when the housing market really took off, and 2008 when the GFC hit, averaged 5.6 per cent – not far off 400 basis points higher than today.
When these kinds of drains on household finances are put alongside tax increases to fund health and education spending, the scale of the housing problem becomes clear.
Labor has put forward a policy to rein in two tax measures that have combined to fuel the house price boom of the past two decades – negative gearing and the capital gains tax discount.
What few have remarked upon, however, is what a modest and gradual change that policy would cause – it would take years to substantially improve housing affordability.
But even fewer have remarked on what the Coalition’s pledge not to change those tax laws would do to housing affordability – that is, continue to make it worse.
There is no single bigger economic problem facing Australian households at present than the debt-funded housing affordability crisis.
And yet many voters will trudge to the polling booths on July 2 still believing that Australia can afford a housing bubble, but can’t afford good health and education.