Inside Story

And that’s housing

Alan Kohler meets the ghost of Bob Menzies in the latest Quarterly Essay

Peter Mares Books 30 November 2023 1306 words

The most powerful players have good reason to want the cost of housing to keep going up, says Kohler. MHJ/iStockphoto

According to Alan Kohler, it’s been downhill for housing in Australia since Bob Menzies took office in 1949. Believing that renters were more likely than homeowners to vote Labor, Australia’s longest-serving prime minister set out to turn Australia into a nation of “little capitalists,” each with a house and a garden to call their own. In the process, Kohler writes in the latest Quarterly Essay, he “destroyed” public housing.

Initially, Menzies’s options were limited by the ten-year Commonwealth State Housing Agreement he inherited from Chifley. The 1945 agreement granted the states long-term loans to build homes for low-income families on the understanding that “a dwelling of good standard and equipment is not only the need, but the right of every citizen.” Its focus was on rental housing, with an option for sitting tenants to purchase their homes on favourable terms.

When the agreement came up for renegotiation, Menzies undermined its intent by encouraging middle-class families to buy public housing too, even though they didn’t live in it. Social affairs minister Bill Spooner argued that it was not “fair” to sell homes to working-class families with “no culture of thrift or sense of community obligation.” Not fair, it seems, to Menzies’s “forgotten people.”

To his credit, Menzies at least built lots of dwellings. Between 1947 and 1961, a period of mass migration, Australia’s housing stock grew about 10 per cent more than its population, with governments responsible for almost a quarter of new construction. Menzies also recognised that the state could play a fundamental role in stabilising a construction industry plagued by booms and busts. As he said in his 1949 campaign speech — the same “little capitalists” speech Kohler quotes — governments could plan public works “for periods when private building falls off.” Subsequent governments have forgotten this insight.

Home ownership rates jumped dramatically under Menzies — rising from about 50 per cent at the end of the war to over 70 per cent in 1966, largely due, claims Kohler, to the aggressive selling of public housing stock forced on the states. With their partisan bias towards home ownership, Menzies and Spooner “set the scene for decades of mistakes by their successors in the Coalition.”

Not that Labor hasn’t made its fair share of housing mistakes. It too failed to invest sufficiently in public housing: prior to the 1983 election, the party promised to double the proportion of public housing stock, but when Bob Hawke replaced Bill Hayden as leader the pledge was dropped.

Equally significant was Labor’s failure to stick to its guns on negative gearing. Treasurer Paul Keating eliminated negative gearing in 1985, arguing that allowing high-income earners to claim interest costs so they could trade forty-year-old Bondi flats “was not adding to the stock of housing or to the stock rental accommodation.” Keating was right, but the Hawke government buckled to the property industry and reinstated negative gearing two years later. If it had followed Keating’s logic and only restored the tax concession for new builds, then the trajectory of Australia’s housing might have been different. Nearly three decades later, having taken such a policy to election defeats in 2016 and 2019, Labor has abandoned it altogether.

Labor has also failed to restore housing to the political and administrative status it enjoyed federally in the postwar years. Chifley had a separate department for works and housing, but Menzies shifted housing to social services, where it sits today. The current deeply flawed development of the Albanese government’s promised national housing and homelessness plan is evidence for Kohler’s view that housing doesn’t belong in the Department of Social Services. Government comes at housing “as a welfare issue rather than an economic one,” he writes, yet housing is “almost everything” in the Australian economy.

Over the past two decades, rocketing real estate prices have taken household debt from 40 per cent to 120 per cent of GDP, tying up capital that could be used for far more productive purposes. Excessive housing costs dampen consumer spending and force families to delay having children. Long commutes in sprawling cities hamper productivity, harm health and worsen the climate catastrophe.

The Reserve Bank “manages the economy mainly through housing”— that is, by changing interest rates — which Kohler labels “a policy of cruelty” because the burden of economic adjustment is borne by those “who are already living on the edge.” Worst of all, Australia’s excessive housing costs drive inequality and erode social mobility. “Education and hard work are no longer the main social determinants of how wealthy you are; now it comes down to where you live and what sort of house you inherit from your parents.”

The most notable policy mistakes that made housing the driver of inequality were Coalition tax concessions. The first was the abolition of inheritance taxes in the 1970s and the second was the halving of the capital gains tax by treasurer Peter Costello in 1999. This was “kerosene on the smouldering coals of negative gearing and the lack of an inheritance tax, and turned property investment from a niche activity into the leaping flame of everybody’s tax avoidance scheme.”

This sets Australia apart: “whereas in the rest of the world investing in real estate is all about getting rental income from tenants, in Australia it’s about getting an income tax deduction and then a capital gain.” It helps explain why Australia’s rental market is dominated by small-scale landlords rather than institutional investors — it is small investors, not big ones, who benefit from tax concessions. Australia has virtually no “build to rent” projects because tax settings encourage developers to build to sell to “individual negative gearers” instead.

Coinciding with Costello’s halving of capital gains tax, which spurred real estate speculation, was a new migration boom that added to supply shortages. Unlike his hero Menzies, though, prime minister John Howard failed to use public investment to help housing keep pace with demand. The result was a two-decade-long price boom that saw the cost of housing diverge sharply from wages. Prior to 2000, the average home cost three or four times average annual earnings; now the multiple is seven or eight.

Kohler also has plenty to say about planning and zoning. He laments that Australia didn’t follow Britain’s postwar lead and standardise development controls across the nation, instead leaving them in the hands of state and local governments. This has created a fragmented, complicated system that not only impedes private construction but also hobbles public projects because state authorities must compete with developers to buy land at market rates. As a result, efforts to address housing need through the planning system are “piecemeal, local initiatives.”

Kohler identifies “two tribes” that dominate housing debates in Australia: “One tribe says the problem is tax breaks that boost demand too much and the other says it’s zoning and planning that restrict supply.”

He avoids taking sides, making clear that the fix for our housing mess will require action on a range of fronts — including not just tax reform and streamlined planning and zoning but also mechanisms to consolidate land in established suburbs. Consolidation would encourage the redevelopment of separate blocks with detached single houses as high-quality European-style medium-density apartments, along with a new vision for urban public transport.

But Kohler is not optimistic about the prospects for change. The politics of housing is “both simple and difficult,” he says. Australia is a “bankocracy” and thanks to Menzies’s legacy housing is “a cartel of the majority.” The most powerful players have good reason to want the cost of housing to keep going up. Those with less clout, like renters in the private market, have the odds stacked against them and will lose out. Ultimately, we’ll all be worse off. •

The Great Divide: Australia’s Housing Mess and How to Fix It
By Alan Kohler | Quarterly Essay | Black Inc. | $27.99 | 144 pages