Economist Saul Eslake has slammed Australian housing policy, saying government self-interest has led to the worst affordability problem in more than 50 years, The Australian Financial Review reports.

According to the newspaper, the chief economist at Bank of America Merrill Lynch blamed government policies including cash grants to first home buyers and negative gearing for inflating the demand for housing without increasing supply.

“Politics – more than any other single factor – means that Australians are likely to have to live with a dysfunctional housing system for a long time yet to come,” he said in a personal submission to a senate inquiry into affordable housing.

Earlier, Antony Cahill, National Australia Bank’s executive general manager in charge of lending and deposits, outlined confidence house prices will continue to lift in 2014, according to The Australian Financial Review.

Mr Cahill said the sector, led by the largest market of Sydney, was performing “strongly” and we should see house price gains persist for a while yet.

“When you look at where we are in terms of values across the market place, affordability remains at good levels at this point in time,” he told the AFR. “We still believe there is room for house prices to grow.”

Mr Cahill pointed to low interest rates as a key to fuelling demand, while adding that Sydney could be in for more moderate growth this year given it outpaced most other markets last year.

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Comment

Saul Eslake’s heart is in the right place, but like most economists, he fails to understand high house prices–more correctly, high land prices–are mainly the result of local, state and federal governments capturing an inadequate portion of our site rents for public purposes via rates and taxes.  Australians have become great rent-seekers. Were governments to capture a greater amount of site rents (and less taxation) there would be less rent to be capitalised into land prices. Simple.

On 2 September 2013, Eslake presented the Henry George Commemoration address “50 years of housing failure“. It’s worth reading.