The world according to GRP — Friday, February 08, 2008:
Building slump is inflationary
[Letter submitted to www.crikey.com.au, Feb.8, 2008 (published Feb.11).]The Reserve Bank raises interest rates in response to inflationary pressure. A major cause of that pressure is scarcity of accommodation in suitable locations. A shortage of commercial/industrial accommodation is a "capacity constraint", limiting the supply of goods & services and raising prices. A shortage of housing pushes up rents (which feed directly into the CPI) and forces employers to offer higher wages in order to attract workers to locations within commuting distance of the available jobs. So if the production cut by Brickworks Ltd and the recent falls in building approvals and home lending are SYMPTOMS of rising interest rates, they are also CAUSES of rising interest rates!
An essential part of any cure is to boost the supply of housing. One way to do this is to make the First Home Owners' Grant available only for NEW homes, so that it works on the supply side instead of the demand side. Another is to deem every investment property to be earning, for tax purposes, a minimum of (say) 3.5% of the site value per annum, so that the owners of idle properties, in order to cover their tax liabilities, will have to generate income from those properties (or sell them to someone who will). Then land approved for development will be developed (not hoarded), and vacant suburban lots will be built upon, and boarded-up buildings will be opened to tenants and buyers.
Copyright © Gavin R. Putland except as otherwise attributed. Posted at The world according to GRP under the title Building slump is inflationary. You may republish this item verbatim on your website or blog provided that you include this notice (with hyperlinks).
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